In Justiss Oil Company, Inc. v. Oil Country Tubular Corp., et al, the Louisiana Third Circuit Court of Appeal joined its sister circuit –the Louisiana Fourth Circuit Court of Appeal, in finding that La. Civ. Code art. 2323 applies only to actions sounding in tort – not to actions in contract, such as redhibition. In doing so, the Third Circuit created an issue ripe for Louisiana Supreme Court decision.
Justiss Oil Company, Inc. (“Justiss”) entered into a turnkey drilling contract to drill a deep oil well using intermediate casing purchased from Oil Country Tubular Co. and manufactured by North American Interpipe, Inc. (collectively, “Defendants”). The casing pipe was API certified to a particular pressure and one of the Defendants’ owners represented to Justiss that the pipe was fit for its intended use. After drilling to a depth of over 12,000 feet, Justiss placed the intermediate casing into the bore and cemented it in place. However, and unbeknownst to Justiss at the time, the intermediate casing was defective and failed to hold pressure at the certified level. After Justiss discovered the defect during pressure testing, it commenced five weeks of efforts to work around the defective pipe to no avail, at a cost of over a million dollars. Justiss then capped the well, resulting in its inability to satisfy its obligations under the turnkey contract.
In a suit filed by Justiss to recover damages in redhibition from both the seller and the manufacturer of the defective casing, the jury returned a special verdict form that found that the pipe was defective, and that the defendants were liable in redhibition, but then found that the redhibitory defect was not the proximate cause of Justiss’ damages, and assigned 90% fault to Justiss, and only 10% fault to one of the defendants. Because of the confusing jury form, the trial court granted Justiss’ Motion for Judgment Notwithstanding the Verdict, and entered a new judgment in favor of Justiss. The new judgment found the defendants were solidarily liable and awarded Justiss the return of the purchase price of the pipe, the costs of repair, including Justiss’ five week efforts to work around the pipe’s defects, and consequential damages representing the lost profits under the turnkey project. However, the trial judge then reduced the award for consequential damages by 90% based on the jury’s allocation of fault. On appeal, the defendants and plaintiff asserted a number of errors, which the appellate court addressed in turn.
Trial Court’s Grant of the JNOV on Proximate Cause was not Manifestly Erroneous
First, the Third Circuit found that the trial judge did not manifestly err in granting the JNOV and reversing the jury’s finding that the defective pipe was not the proximate cause of Justiss’ damages as the jury form was inconsistent and the trial judge’s factual findings on the issue of causation were supported by the evidence. In its reasoning on defendants’ alternative causation theory, the appellate court criticized the defendants’ failure to either continue to drill the well themselves and/or visit the well site to determine the cause of the excessive mud loss (what defendants contended was the result of a hole in the formation) at over 13,000 feet.
The Louisiana Civil Code’s Comparative Fault Article (Article 2323) Applies Only to Tort Causes of Action, Not to Redhibitory Actions
Second, the Third Circuit widened the circuit split on the issue when it found that the apportionment of fault under La. Civ. Code art. 2323 – the Civil Code’s comparative fault provision – was also error. Recognizing that the Louisiana Supreme Court had not ruled squarely on the question, and that the First and Second Circuits have held that article 2323 does apply to actions in redhibition, the Third Circuit joined the Fourth Circuit in finding that the article only applies to actions in tort – not to actions in redhibition which sound in contract. The Third Circuit reasoned that case law references to the comparative fault article’s application to tortfeasors, coupled with the article’s location in the Civil Code – in the Chapter on tort, and the codal distinction between solidary obligors to a contract and those to an offense or quasi-offense, supported the conclusion that article 2323 did not apply to rehdibitory actions.
Damages: Repair & Mitigation Efforts Recoverable Even Though Efforts Were Unsuccessful
Finally, the court turned to the propriety of damages awarded, reciting case law on the liability of manufacturer and seller. The appellate court rejected Defendants’ argument that Justiss could not recover damages because it failed to afford the defendants the opportunity to cure the defect, reasoning that Justiss was under no such duty as to the manufacturer and Justiss could not remove the casing pipe after it was cemented in the well bore. The court also found that the law on redhibition entitled Justiss to recover the repair costs and its attempts to work around the defective pipe, regardless of whether there was an actual hole in the formation that made it impossible to proceed any further. The court found that Justiss was not negligent, and all of its repair efforts would not have been undertaken were it not for the defective pipe. Furthermore, Defendants’ own expert did not say that Justiss’ efforts were unreasonable, and Defendants’ did not demonstrate that Justiss failed to properly mitigate its losses. The appellate court also affirmed the trial court’s award of lost profits under the turnkey contract as consequential damages – rendering a decision that criticized defendants’ hypothesis that “some unknown and speculative intervening cause, i.e. a phantom hole in the formation,” resulted in shutting in the well before completion. The court found that defendants had “squandered their opportunity to gather all the proof they needed to validate their ‘dry hole’ theory.”
The Third Circuit thus reversed the trial court judgment’s apportionment of fault to Justiss, and affirmed the granting of the JNOV and the award of damages (except to deduct the purchase price from the award of consequential damages to preclude a double recovery for this item).
As noted at the outset, the Justiss Oil decision widens the circuit split (First and Second Circuits vs. Fourth and now Third Circuits) over whether comparative fault articulated in Article 2323 of the Louisiana Civil Code should apply to redhibitory actions and creates an issue ripe for decision by the Louisiana Supreme Court. Moreover, given the appellate court’s criticism of defendants, the opinion presents a cautionary tale for potential defendants in redhibition to gather all evidence they can at the time as to other intervening causes.
A copy of the Third Circuit’s decision can be found here. For more information regarding the decision, please contact Erin Bambrick at email@example.com or Elizabeth Wheeler at firstname.lastname@example.org.
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