Ch 21 - Warranties And Product Liability

Front 1

Product Liability:

Back 1

Refers to goods that have caused an injury.

Front 2

The injured party may have a choice if possible remedies, including:

Back 2

1. Warranty, which is an assurance provided in a sales contract
2. Negligence, which refers to unreasonable conduct by the defendant
3. Strict Liability, which prohibits defective products whether the defendant acted reasonably or not.

Front 3

Warranty:

Back 3

A contractual assurance that goods will meet certain standards.

Front 4

Express warranty:

Back 4

One that the seller creates with his words or actions.

Front 5

The UCC establishes that the seller may create an express warranty in three ways:

Back 5

1. With an affirmation of fact or a promise
2. With a description of the goods
3. With a sample or model

Front 6

Affirmation of Fact or Promise:

Back 6

Simply a statement about the nature or quality of the goods. Any affirmation of fact, or any promise, can create an express warranty.

Front 7

A statement is more likely to be an affirmation of fact if:

Back 7

1. It is specific and can be proven true or false
2. It is written
3. Defects are not obvious
4. Seller has greater expertise.

Front 8

Description of Goods:

Back 8

Any description of the goods can create an express warranty.

Front 9

Sample or Model:

Back 9

Any sample or model can create an express warranty.

Front 10

Basis of Bargain:

Back 10

The seller's conduct must have been part of the basis of the bargain.

Front 11

Implied Warranty:

Back 11

Those created by the Code itself, not by any act or statement of the seller.

Front 12

Implied Warranty of Merchantability:

Back 12

Unless excluded or modified, a warranty that the goods shall be merchantable is implied in a contract for their sale, if the seller is a merchant with respect to goods of that kind.

Front 13

The rule of Implied warranty of merchantable goods contains several important principles:

Back 13

1. Unless excluded or modified means that the seller does have a chance to escape this warranty.
2. Merchantability requires that goods be fit for their normal purposes.
3. Implied means that the law itself imposes this liability on the seller.
4. A merchant deals with respect to goods of that kind means that the seller is someone who routinely deals in these goods or holds himself out as having special knowledge about these goods.

Front 14

Implied Warranty of Fitness for a Particular Purpose:

Back 14

Where the seller at the time of contracting knows about a particular purpose for which the buyer wants the goods, and knows that the buyer is relying on the seller's skill or judgment, there is (unless excluded or modified) an implied warranty that the goods shall be fit for the purpose.

Front 15

Here are the keys points of Implied Warranty of Fitness:

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1. Particular Purpose: The seller must know about some special use that the buyer plans for the goods.
2. Seller's Skill: The buyer must be depending upon the seller's skill or judgment in selecting the product, and the seller must know it.
3. Exclusion or Modification: The seller is allowed to modify or exclude any warranty of fitness.

Front 16

Title Warranty:

Back 16

The seller of goods warrants that her title is valid and that the goods are free of any security interest that the buyer knows nothing about, unless the seller has clearly excluded or modified this warranty.

Front 17

Infringement:

Back 17

Unless otherwise agreed, a seller who is a merchant warrants that the goods are free of any rightful claim of copyright, patent, or trademark infringement.

Front 18

Disclaimer:

Back 18

A statement that a particular warranty does not apply. A seller may disclaim warranties, meaning that he eliminates express or implied warranties covering the goods.

Front 19

Oral Express Warranties:

Back 19

Under the Code, a seller may disclaim an oral express warranty.

Front 20

Written Express Warranties:

Back 20

This is the one type of warranty that is difficult or impossible to disclaim. If a seller includes an express warranty in the sales contract, any disclaimer is invalid.

Front 21

Implied Warranties:

Back 21

A seller may Disclaim the implied warranty of merchantability provided he actually mentions the word "merchantability" and makes the disclaimer conspicuous.

Front 22

General Disclaimers:

Back 22

Tho make life easier, the Code permits a seller to disclaim all implied warranties by conspicuously stating that the goods are sold "as is" or "with all faults."

Front 23

Remedy Limitations:

Back 23

The parties may limit or exclude the normal remedies permitted under the Code. A remedy limitation states that if a party does breach its warranty, the injured party will not get all of the damages the Code normally allows.

Front 24

Consequential damages:

Back 24

Losses stemming from the particular requirements of the buyer. An exclusion of consequential damages is void if it is unconscionable.

Front 25

Unconscionable:

Back 25

A remedy restriction is shockingly one-sided and fundamentally unfair.

Front 26

Privity:

Back 26

The relationship that exists between two parties who make a contract, as opposed to a third party who, though affected by the contract, is not a party to it.

Front 27

Personal Injury:

Back 27

Where a product causes a personal injury, most states permit a warranty suit even without privity.

Front 28

Economic Loss:

Back 28

If the buyer suffers only economic loss, privity may still to bring a suit for breach of warranty.

Front 29

Statute of Limitations:

Back 29

The Code prescribes a four-year statute of Limitations. This means that the buyer must bring any lawsuit for breach of a warranty no later than four years after the goods were delivered.

Front 30

Notice of Breach:

Back 30

The UCC requires that a buyer notify the seller of defects within a reasonable time. The purpose here is to enable the seller to cure, by repairing or replacing, any problems with the goods.

Front 31

In negligence cases concerning the sale of goods, plaintiffs most often raise one or more of these claims:

Back 31

1. Negligent Design - The buyer claims that the product injured her because the manufacturer designed it poorly.
2. Negligent Manufacture - The buyer claims that the design was adequate but that failure to inspect or some other sloppy conduct caused a dangerous product to leave the plant.
3. Failure to Warn - A manufacturer is liable for failing to warn the purchaser or users about the dangers of normal use and also foreseeable misuse.

Front 32

Strict Liability:

Back 32

The injured person need not prove that the defendant's conduct was unreasonable.

Front 33

Section 402A of Tort Law:

Back 33

1. One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if:
1. the seller is engaged in the business of selling such a product, and
2. it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold.
2. The rule stated in Subsection (1) applies although:
1. The seller has exercised all possible care in the preparation and sale of his product, and
2. the user or consumer has not bought the product from or entered into any contractual relation with the seller.

Front 34

`Key Terms in Subsection (1):

Back 34

1. Defective condition unreasonably dangerous to the user. The defendant is liable only if the product is defective when it leaves his hands.
2. In the business of selling: The seller is liable only if she normally sells this kind of product.
3. Reaches the user without substantial change.

Front 35

Key Terms in Subsection (2):

Back 35

1. Has exercised all possible care. This is the heart of strict liability, which makes it a potent claim for consumers.
2. No contractual relation.

Front 36

Consumer expectation test:

Back 36

A court finds the manufacturer liable for defective design if the product is less safe than a reasonable consumer would expect.

Front 37

The Principal Factors in the risk-utility test include:

Back 37

1. The value of the product
2. The gravity of the danger (how bad will the harm be)
3. The likelihood that such danger will occur (the odds)
4. The mechanical feasibility of a safer alternative design
5. The adverse consequences of an alternative design (greater cost, different risks created).

Front 38

Restatement (Third) of Torts:

Back 38

Product Liability, Drafted by the American Law Institute in an attempt to harmonize judicial opinions about product liability generally and design defects in particular.

Front 39

The new Restatement treats manufacturing cases differently from those involving design defects and failure to warn:

Back 39

1. In manufacturing cases, a product is defective whenever it departs from its intended design, regardless of how much care was taken. This is the traditional standard.
2. In design and warning cases, a product is defective only when the foreseeable risks of harm could have been reduced by using a reasonable alternative design or warning.

Front 40

Economic Loss Doctrine:

Back 40

When an injury is purely economic, and arises from a contract made by two businesses, the injured party may only sue under the UCC.

Front 41

Two Statutes of Limitations in tort:

Back 41

1. First, the four-year statute of limitations will apply in all cases if economic loss.
2. Second, where the sales contract includes proper disclaimers or remedy limitations, a buyer barred from a negligence case may have no remedy at all.

Front 42

Statute of Repose:

Back 42

Places an absolute limit on when a lawsuit may be filed, regardless of when the defect is discovered.

Front 43

Chapter conclusion:

Back 43

both sellers and buyers of goods must understand the basic principles of product liability law. A seller must understand warranty, negligence, and strict liability law and consider all of those principles when designing, manufacturing, and marketing goods. A buyer, on the other hand, should be aware that each theory provides a possible basis for compensation and that consumers receive particularly strong protection.

Front 44

Chapter Review #1

Back 44

Products can injure. The harm may be economic or physical. The plaintiff might have a remedy in warranty, which is found in the UCC, or one in tort, either for negligence or strict liability. The economic loss doctrine states that, when the injured party is a corporation and the harm is purely economic, the only remedies available are the warranty provisions of the Code. If a corporation suffers physical injury, it will probably be able to sue in tort. A consumer who suffers a physical injury can definitely sue in both tort and warranty, and a consumer who suffers an economic injury can generally, but not always, sue in both.

Front 45

Chapter Review #2

Back 45

The Code prescribes a four-year statute of limitations for breaches of warranty. In tort cases, the statute of limitations runs from whenever the plaintiff should have discovered the defect. For ease of review, the following chart summarizes the different warranty and tort remedies.

Front 46

Chapter Review #3
Express Warranty:

Back 46

1. Contact
2. UCC Sec 2-313
3. May be created by an affirmation of fact, a promise, a description of goods, or a sample, but it must have been the basis of the bargain.
4. Salesman says,“This helicopter will operate perfectly at 16,000 feet.”
5. Written contract may disclaim any and all oral warranties.

Front 47

Chapter Review #4
Implied Warranty of Fitness

Back 47

1. Contact
2. UCC Sec 2-314
3. The Code implies that the goods are fit for their ordinary use.
4. Buyer purchases a deep freezer. The Code implies a warranty that it will keep food frozen.
5. Seller may disclaim this warranty only if a conspicuous disclaimer includes the word “merchantability.”

Front 48

Chapter Review #5
Implied Warranty of Fitness

Back 48

1. Contract
2. UCC Sec 2-315
3. The Code implies that the goods are fit for buyer's special purpose that seller knows about.
4. Where seller knows (1) buyer wants pine trees to plant in sandy soil, and (2) buyer is relying on seller's judgment, the trees carry an implied warranty that they will grow in that soil.
5. Seller may disclaim this warranty with conspicuous writing, but note that some states will disregard a disclaimer of any implied warranty in a consumer sale.

Front 49

Chapter Review #6
Implied Warranty of Title

Back 49

1. Contract
2. UCC Sec 2-312
3. The Code implies that seller has good title, free of any security interests and claims of patent, copyright, or trademark.
4. Seller sells a stolen car to buyer, who must later return it to the rightful owner. Seller has breached his warranty of good title and owes buyer her full damages.
5. Buyer is not protected against any security interests that she knows about.

Front 50

Chapter Review #7
Negligence Tort

Back 50

1. Tort
2. Common Law
3. Seller is liable if she fails to show level of conduct that areasonableperson would use.
4. Manufacturer sells bathing suit made of miracle fabric; buyer swims in ocean where saltwater makes garment transparent; seller's failure to test the suit in saltwater was unreasonable and leaves seller liable. If seller had thoroughly tested and this was a freak occurrence, there would probably be no negligence.
5. No duty to warn if the danger is obvious. (In the bathing suit example, the danger is not obvious and there was a duty to warn.)

Front 51

Chapter Review #8
Strict Liability

Back 51

1. Tort
2. Reinstatement Sec 402A (subject to new revisions) and common law
3. Seller liable if the product leaves in a dangerously a defective condition.
4. Can of barbecue lighter fluid explodes in the users hand because the can's metal was defective; manufacturer took every reasonable precaution to test and inspect every can leaving factory; that reasonable care is irrelevant and seller is liable.
5. Injured buyer need not prove negligence but must prove that the product was defective.

Front 52

Practice Test #1

Back 52

CPA QUESTION Vick bought a used boat from Ocean Marina that disclaimed “any and all warranties.” Ocean was unaware the boat had been stolen from Kidd. Vick surrendered it to Kidd when confronted with proof of the theft. Vick sued Ocean. Who prevails?
a. Vick, because the implied warranty of title has been breached
b. Vick, because a merchant cannot disclaim implied warranties
c. Ocean, because of the disclaimer of warranties
d. Ocean, because Vick surrendered the boat to Kidd

Front 53

Practice Test #2

Back 53

CPA QUESTION To establish a cause of action based on strict liability in tort for personal injuries resulting from using a defective product, one of the elements the plaintiff must prove is that the seller (defendant):
a. Failed to exercise due care
b. Was in privity of contract with the plaintiff
c. Defectively designed the product
d. Was engaged in the business of selling the product

Front 54

Practice Test #3

Back 54

Leighton Industries needed steel pipe to build furnaces for a customer. Leighton sent Callier Steel an order for a certain quantity of “A 106 Grade B” steel. Callier confirmed the order and created a contract by sending an invoice to Leighton, stating that it would send “A 106 Grade B” steel, as ordered. Callier delivered the steel and Leighton built the furnaces, but they leaked badly and required rebuilding. Tests demonstrated that the steel was not, in fact, “A 106 Grade B,” but an inferior steel. Leighton sued. Who wins?

Front 55

Practice Test #4

Back 55

YOU BE THE JUDGE WRITING PROBLEM United Technologies advertised a used Beechcraft Baron airplane for sale in an aviation journal. Attorney Thompson Comerford was interested and spoke with a United agent who described the plane as “excellently maintained” and said it had been operated “under §135 flight regulations,” meaning the plane had been subject to airworthiness inspections every 100 hours. Comerford arrived at a Dallas airport to pick up the plane, where he paid $80,000 for it. He signed a sales agreement stating that the plane was sold “as is” and that there were “no representations or warranties, express or implied, including the condition of the aircraft, its merchantability or its fitness for any particular purpose.” Comerford attempted to fly the plane home, but immediately experienced problems with its brakes, steering, ability to climb, and performance while cruising. (Otherwise it was fine.) He sued, claiming breach of express and implied warranties. Continue on next card

Front 56

Practice Test #4 Continued

Back 56

Did United Technologies breach express or implied warranties?Argument for Comerford: United described the airplane as “excellently maintained,” knowing that Mr. Comerford would rely on that information. United bragged about §135 servicing, when that was obviously a lie. The company should not be allowed to say one thing and put the opposite in writing. Argument for United Technologies: Comerford is a lawyer, and we assume he can read. The contract could not have been clearer. The plane was sold as is. There were no warranties. If Comerford disliked the terms, he should have bargained for a different contract—or walked away. He knew he was buying a risky plane, and it is his to keep.

Front 57

Practice Test #5

Back 57

Round Tire Co. sells 1,000 tires to Green Renta- Car for use on Green's fleet. The same day it sells one new tire to Betty Blue for use on her car. For both sales, Round uses a sales agreement that includes: “LIMITATION OF REMEDIES. Round agrees to repair or replace any tire which Round determines was defective, within 12 months or 25,000, whichever comes first. Buyer agrees that this is Buyer's SOLE REMEDY; Buyer is not entitled to consequential or incidental damages or any other remedy of any kind.” All of Round's tires prove defective. Green is so disgusted it immediately purchases substitute tires from another manufacturer. Green loses $12,000 in extra tire costs and $75,000 in lost rental payments because many of its cars must be off the road waiting for tires. Betty Blue's new tire blows out as she is driving to church, and Betty suffers broken bones. Green and Blue both sue. Predict the outcomes.

Front 58

Practice Test #6

Back 58

ETHICS Texaco, Inc., and other oil companies sold mineral spirits in bulk to distributors, which then resold to retailers. Mineral spirits are used for cleaning. Texaco allegedly knew that the retailers, such as hardware stores, frequently packaged the mineral spirits (illegally) in used half-gallon milk containers and sold them to consumers, often with no warnings on the packages. Mineral spirits are harmful or fatal if swallowed. David Hunnings, aged 21 months, found a milk container in his home, swallowed the mineral spirits, and died. The Hunnings sued Texaco in negligence. The trial court dismissed the complaint and the Hunnings appealed. What is the legal standard in a negligence case? Have the plaintiffs made out a valid case of negligence? Remember that at this stage a court is not deciding who wins, but what standard a plaintiff must meet in order to take its case to a jury. Continued on next card...

Front 59

Practice Test #6 continued

Back 59

Assume that Texaco knew about the repackaging and the grave risk, but continued to sell in bulk because doing so was profitable. (If the plaintiffs cannot prove those facts, they will lose even if they do get to a jury.) Would that make you angry? Does that mean such a case should go to a jury? Or would you conclude that the fault still lies with the retailer and/or the parents? In that case, the court should dismiss the suit against Texaco.

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Practice Test #7

Back 60

Boboli Co. wanted to promote its “California style” pizza, which it sold in supermarkets. The company contracted with Highland Group, Inc., to produce two million recipe brochures, which would be inserted in the carton when the freshly baked pizza was still very hot. Highland contracted with Comark Merchandising to print the brochures. But when Comark asked for details concerning the pizza, the carton, and so forth, Highland refused to supply the information. Comark printed the first lot of 72,000 brochures, which Highland delivered to Boboli. Unfortunately, the hot bread caused the ink to run, and customers opening the carton often found red or blue splotches on their pizzas. Highland refused to accept additional brochures, and Comark sued for breach of contract. Highland defended by claiming that Comark had breached its warranty of merchantability. Please comment.

Front 61

Practice Test #8

Back 61

CPA QUESTION Which of the following conditions must be met for an implied warranty of fitness for a particular purpose to arise?: I. The warranty must be in writing. II. The seller must know that the buyer was relying on the seller in selecting the goods.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

Front 62

Practice Test #9

Back 62

CPA QUESTION Under the UCC sales article, an action for breach of the implied warranty of merchantability by a party who sustains personal injuries may be successful against the seller of the product only when:
a. The seller is a merchant of the product involved
b. An action based on negligence can also be successfully maintained
c. The injured party is in privity of contract with the seller
d. An action based on strict liability in tort can also be successfully maintained

Front 63

Practice Test #10

Back 63

CPA QUESTION Which of the following factors is least important in determining whether a manufacturer is strictly liable in tort for a defective product?
a. The negligence of the manufacturer
b. The contributory negligence of the plaintiff
c. Modifications to the product by the wholesaler
d. Whether the product caused injuries

Front 64

Practice Test #11

Back 64

ROLE REVERSAL Write an essay question concerning a household product that injures a buyer. The buyer sues under theories of warranty and strict liability. The buyer should have a strong claim based on one theory but no reasonable claim based on the other.