20-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Formation and Terms of Sales Contracts Product Liability Performance of Sales Contracts Remedies for Breach of Sales Contracts Sales P A R T

20-3 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 (co-written with Samuel Crowther, 1922)

20-4 Learning Objectives Explain what is required to create an express or implied warranty Identify major categories of product liability claims based in negligence Differentiate strict liability claims from those based on negligence theory Describe the role of comparative negligence

20-5 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

20-6 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

20-7 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

20-8 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

20-9 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

20-10 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.Moss v. Batesville Casket Co. Implied Warranty of Fitness for a Particular Purpose

20-11 Product liability suits based on negligence allege that manufacturer or seller breached a duty to plaintiff by failing to eliminate a reasonably foreseeable risk of harm: –negligent manufacture of the goods (including improper materials and packaging) –negligent inspection –negligent failure to provide adequate warnings –negligent design Negligence Theory

20-12 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

20-13 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

20-14 Federal Magnuson-Moss Warranty Act applies to sales of consumer products more than $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

20-15 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 Other Product Liability Theories

20-16 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

20-17 Basis-of-the-bargain damages: –Buyers of defective goods loss of full value for the goods’ purchase price is 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

20-18 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 Remedy limitation is a clause attempting to block recovery of certain damages –Example of time limitation: “30 day warranty” Disclaimers

20-19 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

20-20 Most states require fact-finder to apportion damages based on relative fault of plaintiff’s and defendant’s percentage shares of the total fault for the injury –Plaintiff is awarded total provable damages times defendant’s percentage of fault Green v. Ford Motor Co.: fact-finder shall apportion fault to injured person only if fault of injured person is a proximate cause of injuries for which damages are soughtGreen v. Ford Motor Co. Comparative Negligence

20-21 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 devicesRiegel v. Medtronic, Inc. Courts mixed whether to treat regulatory compliance as full defense or mere factor in determining defendant’s liability Preemption and Regulatory Compliance

20-22 Thought Question What is your opinion of product liability lawsuits? If you were injured by a defective product, would you file a lawsuit against the manufacturer?