2. 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.

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 (cowritten with Samuel Crowther, 1922)

4. 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 20 - 4

5.  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 20 - 5

6.  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 20 - 6

7.  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 20 - 7

8.  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 20 - 8

9.  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 20 - 9

10.  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 20 - 10

11.  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 20 - 11

12. 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 20 - 12

13. 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 20 - 13

14. 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 20 - 14

15. 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 20 - 15

16. 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? 20 - 16