P A R T P A R T Sales Formation & Terms Product Liability Performance of Sales Contracts Remedies for Breach of Sales Contracts 4 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Product Liability PA E TR HC 20 “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 Motor Company, in My Life and Work (cowritten with Samuel Crowther, 1922)

Learning Objectives  Evolution of product liability law  Theories of product liability recovery:  Express warranty, implied warranties, negligence, strict liability  Other theories of recovery  Time limitations, disclaimers, defenses  Damages

 Express warranty created in three ways:  If affirmation of fact or promise about goods becomes part of the basis of the bargain  A description of the goods that becomes part of the bargain warrants that goods will conform to description  A sample or model of goods warrants that goods will conform to sample Express Warranty

 Implied warranties are created by operation of law rather than seller’s express statements  Warranty of merchantability [UCC 2-314(1)]  See Crowe v. CarMax Auto Superstores, Inc. and Hong v. Marriott Corp.  Warranty of fitness for a particular purpose [UCC section 2–315]  See Bako v. Crystal Cabinet Works, Inc. Implied Warranties

 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

 American Law Institute published section 402A of Restatement (Third) of Torts (1998)  Seller or distributor of 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 Strict Liability Theory

 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 Magnuson-Moss Warranty Act

 Consequential damages: Physical, economic, or emotional damages directly or indirectly related to the event causing harm  Basis-of-the-bargain damages: Value of goods as promised under the contract minus value of goods as received  Punitive damages : To punish defendants for or deter others from knowing and outrageous conduct Damages

 Product liability disclaimer : Seller attempts to eliminate risk of liability by clause in contract  Example: Car sold “as is”  Remedy limitation: attempt to bar recovery of certain damages  Example: “30 day warranty”  See Trinity Industries, Inc. v. McKinnon Bridge Co. Disclaimers

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

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

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

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

Thought Questions  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?