Product liability

This article is an introduction to the basic legal concepts that are necessary to gain an understanding of legal liability and, more specifically, product liability from the perspective of a business owner who has goods manufactured in a foreign country and imports those goods into the United States.  A consumer who is injured while using a product may sue the manufacturer because of a defect in the product that caused the injury. Such instances of alleged wrongful conduct by one person or entity that cause injury to another are governed by tort law.  Tort law, as opposed to criminal law, is the area of the law that addresses injuries caused by a breach of a civil duty owed to another party.  But who bears the responsibility for the injury if the entity that caused the injury resides in a foreign land?  Before answering this question, let us first explore some basic legal concepts.

In decades past, caveat emptor (let the buyer beware) was the prevailing philosophy in contract law. This may have been a realistic approach when buyers and sellers of goods were more or less equally capable of judging the quality of the goods that were the subject of the transaction. However, it is unlikely, in the 21st century, that any consumer will comprehend the workings of any but a few of the goods he or she purchases, much less grasp all of the inherent risks, be able to assume them intelligently and have the financial wherewithal to pay for any resulting injuries or damages. As a result, caveat emptor has given way to a more consumer friendly approach known as warranty. The concept of warranty is based on the seller’s assurances to the buyer that the goods will meet certain standards.

The concept of duty of care arises from the idea that if we are to live in society with other people, some actions can be tolerated and some cannot; some actions are right and some are wrong. The basic rule of duty is that people are free to act as they please so long as their actions do not infringe upon the interests of others. Tort law measures duty by a standard of reasonableness – the reasonable person standard. The reasonable person standard is not how any one person would act, but society’s judgement on how people should act. If the so-called reasonable person existed, he or she would be careful, conscientious, even-tempered and honest. If a person has knowledge, skill, or intelligence superior to that of an ordinary person, the individual’s conduct must be consistent with their superior knowledge, skill or intelligence. In other words, that individual has a higher standard of care; his or her duty must be reasonable in light of his or her superior capabilities.

A person is considered negligent when another party has suffered an injury caused by the failure of said person to live up to a required duty of care. When an individual is negligent he neither intends to bring about the consequences of his act, nor does he foresee their occurrence. He merely creates a risk of the consequences occuring.

Strict Liability is a doctrine of tort law that states that people may be held liable for the results of their acts regardless of their intentions or their exercise of reasonable care. As an example, a construction company that uses dynamite in road construction is strictly liable for any damages caused, even if it takes reasonable and prudent precautions to prevent such damages. It is the insurer of last resort.

Strict liability is imposed by law as a matter of public policy. This public policy rests on the threefold assumption that (1) consumers should be protected from unsafe products; (2) manufacturers and distributors should not be able to escape liability for faulty products simply because they do not have a contractual relationship with the ultimate users of those products; and (3) manufacturers and sellers of those products are in a better position to bear the costs associated with injuries caused by their products than consumers – costs that they can ultimately pass on to all consumers in the form of higher prices.

In order for a manufacturer to be sued under the doctrine of strict liability there are six basic requirements:

  1. The product must be in a defective condition when the defendant sells it.
  2. The defendant must normally be engaged in the business of selling that product.
  3. The product must be unreasonably dangerous to the user or consumer because of its defective condition.
  4. The plaintiff must incur physical harm to self or property by use or consumption of the product.
  5. The defective condition must be the proximate cause of the injury or damage.
  6. The goods must not have been substantially changed from the time they were sold to the time the injury was sustained.

Manufacturers and sellers of goods can be held liable to consumers, users, and bystanders for physical harm or property damage that is caused by the goods they sell. This is called product liability and it encompases the contract theory of warranty and the tort theories of “negligence” and strict liability.

Thus, a manufacturer of a product must exercise due care to make a product safe to be used as intended. Due care must be exercised in designing the product,  selecting the materials,  using the appropriate production processes,  assembling and testing the product, and  placing adequate warnings on the label(s) informing the user of the dangers of which an ordinary person might not be aware. The duty of care extends to the inspection and testing of purchased components used in the final product. The failure to exercise due care is negligence. Simply stated, a manufacturer is liable for its failure to exercise due care to any person who sustains an injury caused by a negligently made (defective) product.

Before any court can hear a case, it must have jurisdiction, the power to hear and decide the case. Without jurisdiction, a court cannot exercise any authority in the case. Therefore, in order for a court to exercise valid authority, that court must have jurisdiction over the person or entity against whom the lawsuit is brought or the property involved in the suit and the subject matter of the case.

Let’s turn our attention to the specific situation of a company that manufactures and packages a product for retail sale in the United States. The supply chain consists of the manufacturer, the wholesaler and the retailer who, being the last entity in the supply chain, sells it to the consumer. Let’s assume that there is an inherent flaw in the design of the product. The product is sold through the supply chain to the consumer and the consumer suffers an injury. The consumer (the plaintiff) brings suit against everyone in the supply chain (the retailer, the wholesaler, and the manufacturer), holding each of them responsible under the theory of strict liability. Consider the positions of the parties in the supply chain. The wholesaler and the retailer did not alter the product or the packaging at all. They merely took delivery and resold the product to the next entity in the channel, yet they bear the full legal responsibility for the defect, the same as if they had manufactured the product themselves. How do they minimize their risk under these circumstances? When the manufacturer of the product obtains liability insurance, their policy typically includes an endorsement known as “Broad Form Vendors” coverage. This endorsement provides coverage for the manufacturer’s vendors for liability arising from defective products. The manufacturer provides certificates of liability to their vendors listing them as additional insureds on their policies. In certain industries this Broad Form Vendors endorsement is essential in allowing the wholesalers and retailers to obtain reasonably priced insurance.

Now let’s apply these legal concepts to the same situation, with the exception that the product is manufactured in China and sold in the United States. The astute reader will immediately grasp the fact that the problem is one of jurisdiction; a United States court has no authority over a manufacturer in China. However, the US court does have authority over the importer who is typically acting as the wholesaler, retailer or both. Since insurance companies know this, they classify and price the policies of companies that are importing goods from China the same as if they were being manufactured in the US.

By William Hughes Product Liability Insurer

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