Formation and Terms of Sales Contracts

Product Liability

Performance of Sales Contracts

Remedies for Breach of Sales Contracts

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Product Liability

A manufacturer is not through with his customer when a sale is completed. He has then only started with his customer.

Henry Ford, founder of Ford MotorCompany, in My Life and Work

(cowritten with Samuel Crowther, 1922)

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Evolution of product liability lawTheories of product liability recovery:

Express warranty, implied warranties, negligence, strict liability

Other theories of recoveryTime limitations, disclaimers, defenses Damages

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Product liability law refers to the body of legal rules governing civil lawsuits for losses and harms resulting from a defendant’s furnishing of defective goods

Rule was caveat emptor (buyer beware), but has shifted over the past century to caveat venditor (let the seller beware) since sellers are better able than consumers to bear the costs of defective products

Development of Product Liability Law

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Product liability law is partly grounded in contract law and partly grounded in tort law

Contract theories are based on an express or implied warranty

Tort theories are based on arguments of negligence or strict liability

Product Liability Theories

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UCC 2–313(1): express warranty may be created in any of three ways: If affirmation of fact or promise about

goods becomes part of the basis of the bargain Statements of value or opinion and sales

puffery do not constitute a warranty Advertisements may contain statements of

warranty as well as sales puffery

Express Warranty

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Felley v. Singleton: Felley bought a used car from the Singletons based on statement of “good mechanical condition”

Car actually was in poor condition Court: “In the context of a used car sale,

representations by the seller such as the car is ‘in good mechanical condition’ are presumed to be affirmations of fact that become part of the basis of the bargain

Example of Express Warranty

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Two other express warranties: A description of the goods that becomes

part of the bargain creates an express warranty that the goods will conform to description

A sample or model of goods to be sold creates an express warranty that goods will conform to sample

Express Warranty

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Implied warranties are created by operation of law rather than seller’s express statements Warranty of merchantability [UCC 2-314(1)]

Seller must be a merchant in the goods of the kind sold

Warranty of fitness for a particular purpose [UCC section 2–315] Seller must know the goods are to be used for

special purpose

Implied Warranties

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In implied warranty cases, plaintiff argues that seller breached warranty by selling unmerchantable goods and plaintiff should recover damages Privity of contract between consumer and

manufacturer is not required

Merchantability, essentially, is that goods must be fit for the ordinary purposes for which such goods are used

Implied Warranty of Merchantability

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Crowe v. CarMax Auto Superstores, Inc.: Couple bought car from CarMax with express

warranties. Car required many repairs, all covered by warranties, but couple sued CarMax claiming unmerchantability

Court found for CarMax: goods need not be perfect to be fit for their ordinary purposes, but must only meet reasonable expectations of average consumer

Couple had unreasonable expectations

Meaning of Merchantability

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Newton v. Standard Candy Co.: Demonstrates disagreement over standard for

food products alleged to be unmerchantable because they contain harmful objects or substances

Under foreign–natural test, defendant is liable if object or substance is “foreign” to the product, but not liable if it is “natural” to the product

But reasonable expectations test increasing in use

Meaning of Merchantability

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Warranty of fitness for a particular purpose implied if: (1) seller has reason to know a particular purpose for which buyer requires the goods; (2) seller has reason to know that buyer is relying on seller’s skill or judgment for the selection of suitable goods; and (3) buyer actually relies on seller’s skill or judgment in purchasing the goods See Moss v. Batesville Casket Co.

Implied Warranty of Fitness for a Particular Purpose

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Product liability suits based on negligence allege that seller or manufacturer breached a duty to plaintiff by failing to eliminate a reasonably foreseeable risk of harm: (1) negligent manufacture of the goods (including

improper materials and packaging) (2) negligent inspection (3) negligent failure to provide adequate warnings (4) negligent design

Negligence Theory

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Croskey v. BMW of North America, Inc.

Facts and Procedural History: Croskey severely burned when plastic neck on car

radiator failed and spewed scalding radiator fluid Croskey pleaded two theories: negligent design

and negligent failure to warn Evidence of similar incidents existed, but court

excluded for negligent design claim Jury returned verdict in favor of defendants

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Appellate Court: Primary issue is design

defect, which requires plaintiff to show that the product was not reasonably safe for its foreseeable uses and a risk-utility analysis favored a safer design

Trial court wrongly excluded evidence of similar incidents

Reversed and remanded 20 - 16

Croskey v. BMW of North America, Inc.

American Law Institute published section 402A of Restatement (Second) of Torts (1965) Most important reason is socialization-of-risk

strategy: strict liability makes it easier for plaintiffs to prove breach of duty and sellers pass on costs in higher prices

Another reason: stimulates manufacturers to design and build safer products

Strict Liability Theory

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Published in 1998, basic rule is: “One engaged in the business of selling or otherwise distributing products who sells or distributes a defective product is subject to liability for harm to persons or property caused by the defect.”

Three kinds of product defects: manufacturing defects, inadequate warnings or instructions, design defects

Restatement (Third) of Torts

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Simo v. Mitsubishi Motors North America, Inc. Court court examined the legal requirements that

govern a strict liability case involving a claim of defective design of an SUV, including proof of reasonable alternative design

Wright v. Brooke Group Limited Iowa Supreme Court announced that in design defect

cases, Iowa will follow the Restatement (Third)’s rule rather than previously applied rules of strict liability and negligence

Strict Liability Cases

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Federal Magnuson-Moss Warranty Act applies to sales of consumer products > $10 per item: If written warranty, it must be full or limited Full warranty promises to (1) remedy any defects

in the product and (2) replace product or refund purchase price if, after reasonable number of attempts, it cannot be repaired

Seller who gives a limited warranty is bound to whatever promises it actually makes

Other Product Liability Theories

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A seller’s misrepresentation about a material fact about the product — a fact that would matter to a reasonable buyer – may invoke liability to a buyer

Industrywide liability: plaintiffs bypass problems of causation that exist where several firms within an industry manufactured a harmful standardized product, and plaintiff cannot prove which firm produced the injurious product

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Other Product Liability Theories

Consequential damages: personal injury, property damage, indirect economic loss (e.g., lost profits or lost business reputation), and noneconomic loss, such as pain and suffering, physical impairment, mental distress, loss of enjoyment of life, loss of companionship or consortium, inconvenience, and disfigurement

Damages

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Basis-of-the-bargain damages: Buyers of defective goods loss of full value for the

goods’ purchase price is a direct economic loss (value of goods as promised under the contract minus value of goods as received)

Punitive damages: Intended to punish defendants who have acted in

an especially outrageous fashion, and to deter them and others from so acting in the future

Damages

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Product liability disclaimer is a clause in the sales contract whereby the seller attempts to eliminate liability it might otherwise have under the theories of recovery described earlier in the chapter

Disclaimers

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Remedy limitation is a clause attempting to block recovery of certain damages Example of time limitation: “30 day warranty”

Disclaimers & Limitations

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Three main defenses in a product liability suit are the overlapping trio of product misuse, assumption of risk, and contributory negligence What could happen on a

construction site? What defenses would exist?

Defenses

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Preemption defense rests on a federal supremacy premise, that federal law overrides state law when the two conflict Riegel v. Medtronic, Inc.: state claims by plaintiffs

preempted by federal statute dealing with medical devices

Courts mixed whether to treat regulatory compliance as full defense or mere factor in determining defendant’s liability

Preemption and Regulatory Compliance

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Test Your Knowledge

True=A, False = B Implied warranties are created by seller’s

conduct rather than express statements Merchantability, essentially, is that goods

must be fit for the ordinary purposes for which such goods are used

A disclaimer is a clause in the sales contract in which seller attempts to eliminate liability seller might otherwise have under law

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Test Your Knowledge

True=A, False = B Under foreign–natural test, defendant is liable if

object or substance is “foreign” to product, but not liable if it is “natural” to the product

Under the Restatement of Torts (Third), three kinds of product defects exist: manufacturing defects, inadequate warnings, design defects

The Magnuson-Moss Warranty Act requires every written warranty to be a full warranty

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Test Your Knowledge

Multiple Choice Express warranty may be created by ________

that becomes part of the basis of the bargain for the agreement:

(a) a statement of fact or promise about goods(b) a description of the goods indicating goods

will conform to the description(c) a sample or model of goods to be sold

indicating goods will conform to the sample(d) all of the above(e) both A and B, but not C

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Test Your Knowledge

Multiple Choice Drew was injured when his car rolled over

after the tires delaminated and caused him to lose control. Drew could sue, claiming:

(a) negligence (design or manufacture)

(b) strict liability

(c) breach of warranty

(d) all of the above

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Product Liability Statistics

Tort claims account for only 5% of the 19.7 million civil claims filed in state courts (Nat’l Center for State Courts, 1992)

Products liability cases account for 4% of all tort cases in state courts (Nat’l Center for State Courts, 1992)

The number of lawsuits filed per capita has remained relatively steady over the past several decades

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Product Liability Statistics

Business cases (financial damages) account for 47% of all punitive damage awards (Rand Institute for Civil Justice, 1996)

In contrast, only 4.4% and 2% of punitive damage awards are due to product liability and medical malpractice cases respectively (Rand Institute for Civil Justice, 1996)

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Thought Question

What is your opinion of product liability lawsuits? If you were injured because of a defect in a product, would you file a lawsuit against the manufacturer?

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