1. Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 18 Warranties and Product Liability

2. 18 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Introduction (1 of 2) warranties Article 2 of the Uniform Commercial Code (UCC) establishes certain warranties that apply to the sale of goods warranties Article 2A of the UCC establishes warranties that apply in lease transactions Consumers and others can sue to recover damages caused by breach of warranty

3. 18 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Introduction (2 of 2) Warranty A buyer’s or lessee’s assurance that the goods meet certain standardsWarranty Products Liability The liability of manufacturers, sellers, and others for the injuries caused by defective products Products Liability The liability of manufacturers, sellers, and others for the injuries caused by defective products

4. 18 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Warranties of Quality Seller’s or lessor’s assurance to buyer or lessee that the goods meet certain standards of quality If the goods fail to meet a warranty, the buyer or lessee can sue the seller or lessor for breach of warranty expressedimplied Warranties may be expressed or implied

5. 18 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Express Warranties (1 of 2) Created when a seller or lessor makes an affirmation that the goods he or she is selling or leasing meet certain standards of quality, description, performance, or condition [UCC 2-313(1); UCC 2A-210(1)] It is not necessary to use formal words such as warrant or guarantee to create an express warranty [UCC 2-313(2); UCC 2A-210 (2)]

6. 18 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Express Warranties (2 of 2) Sellers and lessors are not required to make such warranties Basis of the Bargain Basis of the Bargain – buyers and lessees can recover for breach of an express warranty if the warranty was a contributing factor (not necessarily the sole factor) that induced the buyer to purchase the product or the lessee to lease the product [UCC 2- 313(1); UCC 2A-210(1)]

7. 18 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Implied Warranty of Merchantability (1 of 2) Unless properly disclosed, a warranty is implied when sold or leased goods are fit for the ordinary purpose for which they are sold or leased, and other assurances [UCC 2-314(1); UCC 2A-212(1)] The implied warranty of merchantability does not apply to sales or leases by non- merchants or casual sales

8. 18 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Standards That Must Be Met Implied Warranty of Merchantability: Standards That Must Be Met The goods must be fit for the ordinary purposes for which they are used The goods must be adequately contained, packaged, and labeled The goods must be of an even kind, quality, and quantity within each unit The goods must conform to any promise or affirmation of fact made on the container or label The quality of the goods must pass without objection in the trade Fungible goods must meet a fair average or middle range of quality The goods must be fit for the ordinary purposes for which they are used The goods must be adequately contained, packaged, and labeled The goods must be of an even kind, quality, and quantity within each unit The goods must conform to any promise or affirmation of fact made on the container or label The quality of the goods must pass without objection in the trade Fungible goods must meet a fair average or middle range of quality

9. 18 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Implied Warranty of Fitness for Human Consumption (1 of 2) A warranty that applies to food or drink consumed on or off the premises of: Restaurants Grocery stores Fast-food outlets Vending machines

10. 18 - 10Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Implied Warranty of Fitness for Human Consumption (2 of 2) Consumer Expectation Test A test to determine merchantability based on what the average consumer would expect to find in food products Consumer Expectation Test A test to determine merchantability based on what the average consumer would expect to find in food products Foreign Substance Test A test to determine merchantability based on foreign objects that are found in food Foreign Substance Test A test to determine merchantability based on foreign objects that are found in food

11. 18 - 11Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Implied Warranty of Fitness for a Particular Purpose A warranty that arises where a seller or lessor warrants that the goods will meet the buyer’s or lessee’s expressed needs The warranty is breached if the goods do not meet the buyer’s or lessee’s expressed needs The warranty applies to both merchant and nonmerchant sellers and lessors

12. 18 - 12Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Summary: Express and Implied Warranties of Quality (1 of 2) Type of WarrantyHow CreatedDescription Express warrantyMade by the seller or lessor Affirmation that the goods meet certain standards of quality, description, performance, or condition [UCC 2-313(1); UCC 2A- 210(1)] Implied warranty for fitness for a particular purpose Implied by lawImplied that the goods are fit for the purpose for which the buyer or lessee acquires the goods [UCC 2- 315; UCC 2A-213]

13. 18 - 13Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Summary: Express and Implied Warranties of Quality (2 of 2) Type of WarrantyHow CreatedDescription Implied warranty of merchantability Implied by law if the seller or lessor is a merchant Implied that the goods: 1. Are fit for the ordinary purposes for which they are used 2. Are adequately contained, packaged, and labeled 3. Are of an even kind, quality, and quantity within each unit 4. Conform to any promise or affirmation of fact made on the container or label 5. Pass without objection in the trade 6. Meet a fair average or middle range of quality for fungible goods [UCC 2-314(1); UCC 2A-212(1)]

14. 18 - 14Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Warranty Disclaimers disclaimed Warranties can be disclaimed or limited express warranty If an express warranty is made, it can only be limited if the disclaimer and the warranty can he reasonably construed with each other implied warranties All implied warranties of quality may be disclaimed by expressions like as is, with all faults, or other language that makes it clear to the buyer that there are no implied warranties

15. 18 - 15Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Conspicuous Display of Disclaimer Written disclaimers must be conspicuously displayed to be valid Conspicuous Conspicuous – construed by the courts as noticeable to a reasonable person [UCC 2-316; UCC 2A-214]

16. 18 - 16Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Magnuson-Moss Warranty Act (1 of 2) Federal statute that regulates express full and limited warranties made by sellers and lessors The Act does not require a seller or lessor to make express written warranties However, persons who do make such warranties are subject to the provisions of the Act

17. 18 - 17Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Magnuson-Moss Warranty Act (2 of 2) The Act does not create any implied warranties However, sellers or lessors who make express written warranties relating to consumer products are forbidden from disclaiming or modifying the implied warranties of merchantability and fitness for a particular purpose

18. 18 - 18Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Misrepresentation Product Liability Based on Fault: Misrepresentation intentional misrepresentation A buyer or lessee who is injured because a seller or lessor fraudulently misrepresented the quality of a product can sue the seller under the tort of intentional misrepresentation Seller or lessor either: Affirmatively misrepresents the quality of a product; or Conceals a defect in it Recovery is limited to persons who were injured because they relied on the misrepresentation intentional misrepresentation A buyer or lessee who is injured because a seller or lessor fraudulently misrepresented the quality of a product can sue the seller under the tort of intentional misrepresentation Seller or lessor either: Affirmatively misrepresents the quality of a product; or Conceals a defect in it Recovery is limited to persons who were injured because they relied on the misrepresentation

19. 18 - 19Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Negligence Product Liability Based on Fault: Negligence Negligence Negligence – a tort related to defective products where the defendant has breached a duty of care and caused harm to the plaintiff Failure to exercise due care includes: Failing to assemble the product carefully Negligent product design Negligent inspection or testing of the product Negligent packaging Failure to warn of the negligent propensities of the product Negligence Negligence – a tort related to defective products where the defendant has breached a duty of care and caused harm to the plaintiff Failure to exercise due care includes: Failing to assemble the product carefully Negligent product design Negligent inspection or testing of the product Negligent packaging Failure to warn of the negligent propensities of the product

20. 18 - 20Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Landmark Case: McPherson v. Buick Motor Company The court held that an injured consumer could recover damages from the manufacturer of a product even though he or she was only in privity of contract with the retailer from whom he or she had purchased the product

21. 18 - 21Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Other Warranty Issues Overlapping and inconsistent warranties Warranty disclaimers Conspicuous display of disclaimer Unconscionable disclaimers Warranty disclaimers in software licenses Third-party beneficiaries of warranties

22. 18 - 22Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Strict Liability doctrine of strict liability in tort In Greenmun v. Yuba Power Products, Inc., the California Supreme Court adopted the doctrine of strict liability in tort as a basis for product liability actions Most states have adopted this doctrine as the basis for product liability actions Removes many of the difficulties for the plaintiff associated with other theories of product liability

23. 18 - 23Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Strict Liability: Chain of Distribution chain of distribution strictly liable All parties in the chain of distribution of a defective product are strictly liable for the injuries caused by that product doctrine of strict liability in tort All manufacturers, distributors, wholesalers, retailers, lessors, and subcomponent manufacturers may be sued under this doctrine (doctrine of strict liability in tort)

24. 18 - 24Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Parties Who Can Recover Strict Liability: Parties Who Can Recover Privity of contract is not required for a plaintiff to sue for strict liability The doctrine applies even if the injured party had no contractual relations with the defendant The damages recoverable in a strict liability action vary by jurisdiction

25. 18 - 25Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Damages Recoverable Strict Liability: Damages Recoverable Punitive damages Punitive damages are often awarded in strict liability lawsuits if the plaintiff proves that the defendant either: Intentionally injured him or her; or Acted with reckless disregard for his or her safety

26. 18 - 26Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Defective product causes injury Negligence lawsuit Strict liability Consumer Retailer Distributor Manufacturer (negligent) Defective product Defendant All in the chain of distribution are liable Negligent party is liable Doctrines of Negligence and Strict Liability Compared Strict Liability Lawsuit Negligence Lawsuit

27. 18 - 27Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Concept of Defect defective To recover for strict liability, the injured party must first show that the product that caused the injury was somehow defective Plaintiffs can allege multiple product defects in one lawsuit

28. 18 - 28Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 1. Defects in Manufacture 2. Defects in Design 3. Defects in Packaging 4. Failure to Warn Common Types of Defects

29. 18 - 29Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Crashworthiness Doctrine The courts have held that automobile manufacturers are under a duty to design automobiles so they take into account the possibility of harm from a person’s body striking something inside the automobile in the case of a car accident.

30. 18 - 30Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Other Product Defects Failure to provide adequate instructions Inadequate testing of products Inadequate selection of component parts or materials Improper certification of the safety of a product

31. 18 - 31Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Defenses to Product Liability 1.Supervening Event 2.Generally Known Dangers 3.Assumption of the Risk 4.Government Contractor Defense 1.Supervening Event 2.Generally Known Dangers 3.Assumption of the Risk 4.Government Contractor Defense 5.Misuse of the Product 6.Statute of Limitations 7.Contributory and Comparative Negligence 5.Misuse of the Product 6.Statute of Limitations 7.Contributory and Comparative Negligence

32. 18 - 32Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. International Law: Product Liability in Japan (1 of 2) Product liability claims are rare in Japan for several reasons: 1.The plaintiff has the difficult burden of proving that the company was negligent 2.Japanese courts do not allow discovery 3.Claimants must pay a percentage of any damages requested (not won) as court fees

33. 18 - 33Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. International Law: Product Liability in Japan (2 of 2) 4.Awards granted by courts are small (by U.S. standards) 5.Punitive damages are not available