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This Document Contains Chapters 23 to 24 Chapter 23 TRANSFER OF TITLE AND RISK OF LOSS Transfer of Title [23-1] Identification [23-1a] Insurable Interest Security Interest Passage of Title [23-1b] Physical Movement of the Goods No Movement of the Goods Power to Transfer Title [23-1c] Void and Voidable Title to Goods Entrusting of Goods to a Merchant Risk of Loss [23-2] Risk of Loss Where There is a Breach [23-2a] Breach by the Seller Breach by the Buyer Risk of Loss in Absence of a Breach [23-2b] Agreement of the Parties Trial Sales Contracts Involving Carriers Goods in Possession of Bailee All Other Sales Sales of Goods in Bulk [23-3] Cases in This Chapter Robinson v. Durham Heinrich v. Titus-Will Sales, Inc. Windows, Inc. v. Jordan Panel Systems Corp. Martin v. Melland’s Inc. Chapter Outcomes After reading and studying this chapter, the student should be able to: • Explain the relative importance of title under the common law and Article 2. • Explain when the seller has a right or power to transfer title and when the transfer is void or voidable. • Distinguish between a shipment contract and a destination contract and explain when title and risk of loss pass under each. • Identify and explain the rules covering (1) risk of loss in the absence of a breach and (2) risk of loss when there is a breach. • Explain how bulk transfers concern creditors and how the Uniform Commercial Code attempts to regulate such transfers. TEACHING NOTES A sale of goods is the transfer of title from the seller to the buyer for a consideration known as the price. A contract for sale of goods requires each party to perform some obligation and gives each party the right to expect performance by the other party. Performance by each party, transfer of title, and allocation of risk of loss are all important to a sale of goods. 23-1 TRANSFER OF TITLE Title cannot pass under a contract for sale until existing goods have been identified as those to which the contract refers. Future goods (goods that are not both existing and identified) cannot constitute a present sale. In a lease title does not pass. Instead, the lessee obtains the right to possess and use the goods for a period of time in return for consideration. Section 2A-103(1)(j). 23-1a Identification At some point the seller obtains, manufactures, prepares, or selects existing goods which she intends to deliver to or hold for the buyer. Identification may be made by either the seller or the buyer, at any time, and in any manner agreed upon. If not otherwise specified, identification takes place: 1. when the contract is made, if it is for goods already existing and identified; 2. when the seller ships, marks, or otherwise designates existing goods, if the contract is for goods which did not already exist at the time of the contract; or 3. when the crops are planted or start growing, if the contract is for crops to be grown within twelve months, or at the time of the next normal harvest, or when the young animals are conceived, if the contract is for the offspring of animals to be born within twelve months. *** Chapter Outcome *** Explain the relative importance of title under the common law and Article 2. Insurable Interest — At common law, only a person with title or a lien (a legal claim of a creditor on property) could insure his interest in specific goods. The Code extends an insurable interest to a buyer’s interest in goods that have been identified as the goods in a contract. The seller also has an insurable interest in the goods as long as he has title to them or any security interest in them. In a lease, the lessor retains an insurable interest in the goods until an option to buy, if included in the lease, has been exercised by the lessee. 2A–218(3). Security Interest — A security interest is defined as an interest in personal property or fixtures that ensures payment or performance of an obligation. Any reservation by the seller of title to goods delivered to the buyer is considered a security interest. 23-1b Passage of Title Title passes when the parties intend it to pass, provided the goods exist and have been identified. If the parties have no explicit agreement as to when title is transferred, the Code provides rules that determine when title passes to the buyer. *** Chapter Outcome *** Distinguish between a shipment contract and a destination contract and explain when title and risk of loss pass under each. Physical Movement of the Goods — When delivery is to be made by moving the goods, title passes at the time and place the seller completes his delivery of the goods. When and where delivery occurs depends upon the type of contract. • A shipment contract does not name a required destination; title is transferred when and where the seller delivers goods to the carrier who will deliver them. • A destination contract specifies the destination; title is transferred upon tender of goods at the destination. No Movement of the Goods — When delivery is to be made without moving the goods, unless otherwise agreed, title passes (a) on delivery of a document of title, or (b) at the time and place of contracting, if the goods are identified and no documents are to be delivered. Where the goods are not identified at contracting, title passes when the goods are identified. *** Chapter Outcome *** Explain when the seller has a right or power to transfer title and when the transfer is void or voidable. 23-1c Power to Transfer Title If the seller is the rightful owner of goods or is authorized to sell the goods for the rightful owner, the seller has the right to transfer title. In some situations, however, unauthorized sellers may have the power to transfer title to certain buyers. This section pertains to such sales by a person in possession of goods that he neither owns nor has authority to sell. NOTE: See Figures 23-1 and 23-2 Void and Voidable Title to Goods — A person claiming ownership of goods by an agreement that is void obtains no title to the goods and therefore cannot transfer it. A voidable title is one for which the transferor can reverse the transfer of title back to herself. Although the buyer has acquired legal title, the seller may rescind the transfer. If, however, the buyer were to resell the goods to a good faith purchaser for value, before the seller has rescinded the transfer of title, the right of rescission in the seller is ended, and the good faith purchaser acquires good title. NOTE: See text discussion of the Code’s treatment of titles transferred to good faith purchasers. CASE 23-1 ROBINSON V. DURHAM Alabama Court of Civil Appeals, 1988 537 So.2d 966 http://scholar.google.com/scholar_case?case=15758867258525788627&hl=en&as_sdt=2&as_vis=1&oi=scholarr Wright, J. Ronald Robinson, Wyman Robinson, and Friendly Discount Auto Sales (appellants) appeal from the granting of summary judgment in favor of appellee Mike Durham (Durham). The facts material to this appeal and dispositive of this case are undisputed. Appellants, who are in car sales, purchased a 1968 Chevrolet Camaro. At I the time of the purchase, a female transferred to the appellants tag receipts in her name and in the name of the previous owner. Wyman Robinson then registered the automobile in his name. In September 1986 Durham purchased the automobile from appellants, and all prior documentation was transferred to him. Shortly thereafter, the F.B.I. seized the automobile. The automobile had been reported stolen in Florida. It was subsequently returned to the original owner. Durham filed a suit against appellants alleging fraud, breach of contract, and breach of warranty. Durham moved for summary judgment against appellants on all counts. The trial court granted Durham’s motion on the count alleging that appellants made a statement to Durham as true without knowledge of its truth and on the issue of breach of warranty of title. Durham was awarded $5,200, the amount he paid for the car. Appellants appeal. Appellants assert that the grant of summary judgment was in error because there was “a scintilla of evidence, if not substantial evidence” from which the trial court could have concluded that appellants held good title “or at least voidable title” on the automobile, thereby conveying actual title to Durham at the time of the purchase. Appellants’ argument is without merit. It is unequivocal that “a person who has stolen goods of another cannot pass title thereto to another, whether such other knew, or did not know, that the goods were stolen.” [Citations.] A thief gets only void title and without more cannot pass any title to a subsequent purchaser, even a good faith purchaser. [Citation.] It is undisputed that the automobile had been stolen. Therefore, at the time of purchase appellants obtained no title. In other words, the title was void. Appellants could not convey good title to Durham; therefore, the subsequent sale to Durham constituted a breach of warranty of good title. Relying on §2–403(1), [UCC], appellants contend that they at least acquired a voidable title when they purchased the automobile. Section 2–403 recognizes that a person with voidable title has power to transfer a good title to a good faith purchaser for value. Voidable title can only arise from a voluntary transfer, and the rightful owner must assent to the transfer. “A possessor of goods does not have voidable title unless the true owner has consented to the transfer of title to him.” [Citation.] In this case the rightful owner did not consent or assent to the transfer of the automobile. Appellants obtained no title. * * * Affirmed. All the Judges concur. Entrusting of Goods to a Merchant — If an owner of goods has entrusted goods to a bailee, such as a repairman, who then sells the goods to a third party, the owner of the goods has a right of recourse. The question then becomes, what right should the true owner of the goods have against the third party (the purchaser)? Once again, the law must balance the right of ownership against the rights of parties in market transactions. If the bailee is a merchant who deals in goods of the kind sold, the Code protects the third party buyer (called a buyer in the ordinary course of business). Because the merchant is cloaked with the appearance of ownership or apparent authority to sell, the innocent third-party purchaser is unlikely to know that the merchant is not the rightful owner of the goods. CASE 23-2 HEINRICH V. TITUS-WILL SALES, INC. Court of Appeals of Washington, Division 2, 1994 73 Wash. App. 147, 868 P.2d 169 http://scholar.google.com/scholar_case?case=18393426036611380515&q=868+P.2d+169&hl=en&as_sdt=2,34 Seinfeld, J. [In 1989, Michael Heinrich retained James Wilson to purchase a new Ford pickup truck for him. Wilson had held himself out as a dealer/broker, but unbeknownst to Heinrich, Wilson had lost his vehicle dealer license. Wilson negotiated with Titus-Will Ford Sales, Inc. (Titus-Will) to purchase the truck for Heinrich. Titus-Will had dealt with Wilson as a dealer before but also did not know that he had lost his dealer license. All payments for the truck went through Wilson, and the purchase order indicated that the truck was being sold to Wilson as a dealer for resale. Wilson agreed to deliver the truck to Heinrich at Titus-Will on Saturday, October 21, 1989. Wilson delivered to a clerk at Titus-Will a postdated check for the balance of the purchase price, which the clerk accepted, and in return delivered to Wilson a packet containing the keys to the truck, the owner’s manual, an odometer disclosure statement, and the warranty card. The odometer statement showed that Wilson was the transferor and Titus-Will did not fill out the warranty card, as the sale appeared to be dealer to dealer. Wilson’s check, however, did not clear, and Titus-Will demanded the return of the truck. On November 6, Wilson picked up the truck from Heinrich, telling him he would have Titus-Will make certain repairs under the warranty, and returned the truck to Titus-Will. On November 9, 1989, Wilson admitted to Heinrich that he did not have funds to cover his check and that Titus-Will would not release the truck without payment. Heinrich then asked Titus-Will for the truck but was refused. Heinrich sued Titus-Will and Wilson, seeking return of the truck and damages for his loss of use. By pretrial arrangement, Heinrich regained possession of, but not clear title to, the truck. Heinrich also obtained a default order against Wilson. After a bench trial, the court awarded Heinrich title to the truck and $3,050 in damages for loss of its use. Titus-Will appeals.] The Entrustment Doctrine [UCC] 2–403(2) and (3) contain the entrustment provisions of the Uniform Commercial Code (UCC). * * * To prevail under this statute, Heinrich must show (1) Titus-Will “entrusted” the truck to Wilson and, thus, empowered Wilson subsequently to transfer all rights of Titus-Will in the truck to Heinrich; (2) Wilson was a merchant dealing in automobiles; and (3) Heinrich bought the truck from Wilson as a “buyer in ordinary course of business.” [Citations.] Three general policies support [§] 2–403(2), the UCC provision placing the risk of loss on the entruster. First, it protects the innocent buyer who, based on his observation of goods in the possession of a merchant of those goods, believes that the merchant has legal title to the goods and can, therefore, pass title in the goods to another. [Citation.] The statute carries forward the pre-Uniform Commercial Code law of estoppel under which an owner, who clothes a merchant with apparent ownership of or authority to sell goods, is estopped from denying such authority as against one buying the goods from the merchant in good faith. [Citations.] Secondly, the entrustment clause reflects the idea that the entruster is in a better position than the innocent buyer to protect against the risk that an intermediary merchant will not pay for or not deliver the goods. [Citations.] Thirdly, the entrustment clause facilitates the flow of commerce by allowing purchasers to rely on a merchant’s apparent legal right to sell the goods. [Citations.] Without the safeguards of the entrustment provision, a prudent buyer would have to delay the finalization of any sizeable sales transaction for the time necessary to research the merchant’s ownership rights to the goods. Entrusting The UCC definition of “entrusting,” contained in 2– 403(3), is broad. [Citation.] The statute declares that “any delivery and any acquiescence in retention of possession” constitutes entrustment. 2–403(3). A person can entrust goods to a merchant by a variety of methods, such as consigning them, creating a bailment, taking a security interest in inventory, leaving them with the merchant after purchase, and delivering them for purposes of repair. [Citations.] A sale can also constitute an entrustment when some aspect of the transaction remains incomplete. [Citations.] Titus-Will properly concedes that it entrusted the truck to Wilson. However, it argues Wilson was not a merchant and Heinrich was not a buyer in ordinary course. Further, Titus-Will contends that the timing of the entrusting deprived Wilson of the power to transfer its rights. Merchant Titus-Will argues that Wilson was not a merchant because he had no inventory. However, it is not necessary to possess an inventory to fit within the broad statutory definition of merchant. Article 2 of the UCC defines (in part) “merchant” as “a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction.” 2–104(1). Wilson was a merchant who dealt in automobiles; he held himself out as a dealer in automobiles and appeared to be a dealer in automobiles. Both parties treated him as one. Titus-Will processed all the documents as it would for a dealer and understood that Wilson was buying the truck for resale. Titus-Will also argues that Wilson was not a merchant because he did not have a vehicle dealer license. However, the UCC does not require proper state licensing for merchant status. 2–104(1), 2–403(2). * * * Buyer in Ordinary Course There is also substantial evidence that Heinrich was a “buyer in ordinary course of business” although the trial court referred to him as a “good faith purchaser for value.” A buyer in ordinary course of business is a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind[.] 1-201(9). “Buying” includes receiving goods * * * under a pre-existing contract for sale.” 1-201(9). Good faith is “honesty in fact in the conduct or transaction concerned.” 1- 201(19). The amount of the consideration is significant as evidence of good faith. [Citation.] Heinrich gave substantial value for the truck, more than Wilson agreed to pay Titus-Will. Nor did Heinrich know or have a basis to believe that Wilson’s sale and delivery of the truck to him violated Titus-Will’s ownership or security interest rights. There was no showing that Heinrich acted other than in good faith. * * * Wilson’s illegal and fraudulent activity does not taint Heinrich’s status as a buyer under 2–403(2). When Heinrich accepted delivery after previously paying Wilson, Heinrich was “buying” as defined by 1–201(9). Timing of Entrustment Titus-Will also argues that the UCC entrustment provisions should not apply because it entrusted the truck to Wilson after Heinrich had completely paid Wilson. This is an issue of first impression in this jurisdiction. Before the completion of the Wilson–Heinrich sales transaction, Titus-Will entrusted Wilson not only with the truck, but also with the signed odometer disclosure statement, the owner’s manual, the warranty card, and the keys. By doing so, Titus-Will clothed Wilson with additional indicia of ownership and with the apparent authority to transfer an ownership interest in the truck. It also enabled Wilson to complete the sales transaction. 2–401(2) (“Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods”). In addition, the entrustment allowed Wilson to continue to deceive Heinrich from October 21, 1989, the date of delivery of possession, to November 9, 1989, when Wilson finally admitted the truth. We believe that under these circumstances, application of the entrustment doctrine, 2–403(2), furthers the policy of protecting the buyer who relies on the merchant’s apparent legal ability to sell goods in the merchant’s possession. The second rationale for the entrustment doctrine also supports its application here. Titus-Will, in the business of selling cars, was in a better position than Heinrich to protect itself against another dealer/broker who might fail to pay for the goods. It could have insured against the loss, and it could have adopted preventive procedures. * * * The third rationale for the entrustment doctrine focuses on the flow of commerce. Here we consider the potential impact on commercial transactions of requiring purchasers to research their dealer/broker’s legal title before accepting possession of the goods. Although the record contains no evidence on this issue, it seems obvious that this requirement would inevitably cause some delay. [Citation.] Requiring the entruster to retain the burden of risk, even when the entrustment occurs after a third party purchaser gives value, supports the policies underlying the entrustment doctrine. * * * The trial court did not err in applying the entrustment doctrine and granting replevin. * * * We affirm the trial court’s judgment. 23-2 RISK OF LOSS Losses are borne by either the seller, the buyer or both when goods have been damaged, destroyed, or lost without the fault of either the seller or the buyer. If the loss is placed on the buyer, he is under a duty to pay the price for the goods even though they were damaged or he never received them. If placed on the seller, she has no right to recover the purchase price from the buyer, although she does have a right to the return of the damaged goods. CISG — Loss or damage after the risk of loss has passed to the buyer does not excuse the buyer from paying for the goods. *** Chapter Outcome *** Identify and explain the rules covering (1) risk of loss in the absence of a breach and (2) risk of loss when there is a breach. 23-2a Risk of Loss Where There Is a Breach Where one party breaches the contract, the Code places the risk of loss on the party who breaches the contract. If, however, the nonbreaching party is in control of the goods, the Code places the risk of loss on him to the extent of his insurance coverage. Except in a finance lease, risk of loss is retained by the lessor and does not pass to the lessee. 2A–219(1). In a finance lease, risk of loss passes to the lessee as discussed below Breach by the Seller — The risk of loss is on the seller until the buyer has accepted the goods or until the seller has remedied the defect. If the buyer accepts, and then rightfully revokes his acceptance of goods, the risk of loss is on the seller, beyond the buyer’s insurance coverage. Breach by the Buyer — Where conforming goods have been identified to a contract that the buyer repudiates or breaches before risk of loss has passed to him, the seller may treat the risk of loss as resting on the buyer “for a commercially reasonable time” beyond the seller’s effective insurance coverage. 23-2b Risk of Loss in Absence of a Breach Where there is no breach, the risk of loss may be allocated by the agreement of the parties. If the parties have not otherwise agreed, the Code places the risk of loss, for the most part, on the party who is more likely to have greater control over the goods, is more likely to insure the goods, or is better able to prevent the loss of the goods. Agreement of the Parties — The parties, by agreement, may not only shift the allocation of risk of loss but may also divide the risk between them. Such an agreement is controlling. Trial Sales — Some sales allow the buyer to try the goods for a period of time and then return them without any reason required. The Code recognizes two types of trial sales — sale on approval (goods primarily for the buyer’s use) and sale or return (goods primarily for resale by a buyer). NOTE: See textbook for a discussion of how consignment arrangements are treated by the Code. Contracts Involving Carriers — Sales contracts frequently contain terms which identify it as either a shipment contract or a destination contract. Under a shipment contract, risk of loss passes to the buyer when the goods are delivered to the common carrier. Under a destination contract, risk of loss passes to the buyer when the goods are tendered to the buyer at the named destination. CISG — If a contract does not specify a place for the seller to hand over the goods for carriage, risk of loss transfers to the buyer when the goods are delivered to the first carrier. If the contract does state a place, risk of loss transfers when the goods are handed over at that place. CASE 23-3 WINDOWS, INC. V. JORDAN PANEL SYSTEMS CORP. United States Court of Appeals, Second Circuit, 1999 177 F.3d 114 http://scholar.google.com/scholar_case?case=11386214941351710507&q=177+F.3D+114&hl=en&as_sdt=2,21 Leval, C. J. This is an appeal by a buyer from a grant of summary judgment in favor of the seller dismissing the buyer’s claim for incidental and consequential damages resulting from damage suffered by the goods during shipment. The district court found that any negligence that might have caused the damage was attributable to the carrier and not the seller. It therefore concluded that the buyer’s claim for incidental and consequential damages was barred by UCC §2–613, which precludes the award of such damages when the goods are damaged “without fault of either party.” We affirm, but in reliance on different provisions of the Code. Windows, Inc. (“Windows” or “the seller”) is a fabricator and seller of windows, based in South Dakota. Jordan Systems, Inc. (“Jordan” or “the buyer”) is a construction subcontractor, which contracted to install window wall panels at an air cargo facility at John F. Kennedy Airport in New York City. Jordan ordered custom-made windows from Windows. The purchase contract specified that the windows were to be shipped properly packaged for cross country motor freight transit and “delivered to New York City.” Windows constructed the windows according to Jordan’s specifications. It arranged to have them shipped to Jordan by a common carrier, Consolidated Freightways Corp. (“Consolidated” or “the carrier”), and delivered them to Consolidated intact and properly packaged. During the course of shipment, however, the goods sustained extensive damage. Much of the glass was broken and many of the window frames were gouged and twisted. Jordan’s president signed a delivery receipt noting that approximately two-thirds of the shipment was damaged due to “load shift.” Jordan, seeking to stay on its contractor’s schedule, directed its employees to disassemble the window frames in an effort to salvage as much of the shipment as possible. Jordan made a claim with Consolidated for damages it had sustained as a result of the casualty, including labor costs from its salvage efforts and other costs from Jordan’s inability to perform its own contractual obligations on schedule. Jordan also ordered a new shipment from Windows, which was delivered without incident. Jordan did not pay Windows for either the first shipment of damaged windows or the second, intact shipment. Windows filed suit to recover payment from Jordan for both shipments in the Supreme Court of the State of New York, Suffolk County. Jordan counterclaimed, seeking incidental and consequential damages resulting from the damaged shipment. * * * Windows later withdrew its claims against Jordan. The only remaining claim is Jordan’s counterclaim against Windows for incidental and consequential damages. The district court granted Windows’ motion for summary judgment. * * * This appeal followed. * * * Jordan seeks to recover incidental and consequential damages pursuant to [the] UCC. Under that provision, Jordan’s entitlement to recover incidental and consequential damages depends on whether those damages “result[ed] from the seller’s breach.” A destination contract is covered by §2–503(3); it arises where “the seller is required to deliver at a particular destination.” In contrast, a shipment contract arises where “the seller is required * * * to send the goods to the buyer and the contract does not require him to deliver them at a particular destination.” §2–504. Under a shipment contract, the seller must “put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case.” §2–504(a). * * * Where the terms of an agreement are ambiguous, there is a strong presumption under the UCC favoring shipment contracts. Unless the parties “expressly specify” that the contract requires the seller to deliver to a particular destination, the contract is generally construed as one for shipment. [Citations.] Jordan’s confirmation of its purchase order, by letter to Windows dated September 22, 1993, provided, “All windows to be shipped properly crated/packaged/boxed suitable for cross country motor freight transit and delivered to New York City.” We conclude that this was a shipment contract rather than a destination contract. To overcome the presumption favoring shipment contracts, the parties must have explicitly agreed to impose on Windows the obligation to effect delivery at a particular destination. The language of this contract does not do so. Nor did Jordan use any commonly recognized industry term indicating that a seller is obligated to deliver the goods to the buyer’s specified destination. Under the terms of its contract, Windows thus satisfied its obligations to Jordan when it put the goods, properly packaged, into the possession of the carrier for shipment. Upon Windows’ proper delivery to the carrier, Jordan assumed the risk of loss, and cannot recover incidental or consequential damages from the seller caused by the carrier’s negligence. This allocation of risk is confirmed by the terms of [the] UCC §2–509(1)(a), entitled “Risk of Loss in the Absence of Breach.” It provides that where the contract “does not require [the seller] to deliver [the goods] at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier.” UCC §2–509(1)(a). As noted earlier, Jordan does not contest the court’s finding that Windows duly delivered conforming goods to the carrier. Accordingly, as Windows had already fulfilled its contractual obligations at the time the goods were damaged and Jordan had assumed the risk of loss, there was no “seller’s breach” as is required for a buyer to claim incidental and consequential damages under §2–715. * * * The judgment of the district court is affirmed. 23-2c Goods in Possession of Bailee Where a bailee has possession of the goods, delivery can be made without movement of the goods. The Code provides that the risk of loss will pass in this situation: a) when the buyer receives the negotiable title document, and b) when a non-negotiable title document is tendered to the buyer. If title documents are not used, the risk passes when the seller tenders to the buyer instructions directing the bailee to deliver or the bailee acknowledges the buyer’s right to possession. CISG — When a buyer is to take goods at a place other than the seller’s business, risk of loss passes when the buyer knows that the goods are available to the buyer at that place. 23-2d All Other Sales If the contract is not a trial sale, does not require delivery by a carrier, and the goods are not possessed by a bailee, risk of loss will depend on the status of the parties. Where the seller is a merchant, the buyer assumes the risk after receiving the goods. If the seller is a nonmerchant, the risk shifts when the goods are tendered. CISG — If the sale does not involve carriage of goods, the risk of loss passes to the buyer when he takes possession of the goods, or if he does not take possession in due time, risk passes when the goods are placed at his disposal. NOTE: See Figure 23-3 for a summary of risk of loss in absence of breach. CASE 23-4 MARTIN V. MELLAND’S INC. Supreme Court of North Dakota, 1979 283 N.W.2d 76 http://scholar.google.com/scholar_case?case=283656012940553957&hl=en&as_sdt=2&as_vis=11&oi=scholarr Erickstad, C. J. The narrow issue on this appeal is who should bear the loss of a truck and an attached haystack mover that was destroyed by fire while in the possession of the plaintiff, Israel Martin (Martin), but after certificate of title had been delivered to the defendant, Melland’s Inc. (Melland’s). The destroyed haymoving unit was to be used as a trade-in for a new haymoving unit that Martin ultimately purchased from Melland’s. Martin appeals from a district court judgment dated September 28, 1978, that dismissed his action on the merits after it found that at the time of its destruction Martin was the owner of the unit pursuant to [UCC Section 2–401]. We hold that Section 2–401 is inapplicable to this case, but we affirm the district court judgment on the grounds that risk of loss had not passed to Melland’s pursuant to [UCC Section 2–509]. On June 11, 1974, Martin entered into a written agreement with Melland’s, a farm implement dealer, to purchase a truck and attached haystack mover for the total purchase price of $35,389. Martin was given a trade-in allowance of $17,389 on his old unit, leaving a balance owing of $18,000 plus sales tax of $720 or a total balance of $18,720. The agreement provided that Martin “mail or bring title” to the old unit to Melland’s “this week.” Martin mailed the certificate of title to Melland’s pursuant to the agreement, but he was allowed to retain the use and possession of the old unit “until they had the new one ready.” The new unit was not expected to be ready for two to three months because it required certain modifications. During this interim period, Melland’s performed minor repairs to the trade-in unit on two occasions without charging Martin for the repairs. Fire destroyed the truck and the haymoving unit in early August, 1974, while Martin was moving hay. The parties did not have any agreement regarding insurance or risk of loss on the unit and Martin’s insurance on the trade-in unit had lapsed. Melland’s refused Martin’s demand for his new unit and Martin brought this suit. * * * The district court found “that although the Plaintiff [Martin] executed the title to the * * * [haymoving unit], he did not relinquish possession of the same and therefore the Plaintiff was the owner of said truck at the time the fire occurred pursuant to Section 2–401.” [Martin appealed.] * * * * * * the concept of title under the UCC is of decreased importance. * * * No longer is the question of title of any importance in determining whether a buyer or seller bears the risk of loss. [Citation.] * * * Thus, the question in this case is not answered by a determination of the location of title, but by the risk of loss provisions in [UCC §2–509]. Before addressing the risk of loss question in conjunction with [UCC §2–509], it is necessary to determine the posture of the parties with regard to the trade-in unit, i.e. who is the buyer and the seller and how are the responsibilities allocated. It is clear that a barter or trade-in is considered a sale and is therefore subject to the Uniform Commercial Code. [Citations.] It is also clear that the party who owns the trade-in is considered the seller. [UCC §2–304] provides that the “price can be made payable in money or otherwise. If it is payable in whole or in part in goods each party is a seller of the goods which he is to transfer.” [Citations.] Martin argues that he had already sold the trade-in unit to Melland’s and, although he retained possession, he did so in the capacity of a bailee (apparently pursuant to [UCC §2–509(2)]). White and Summers in their hornbook on the Uniform Commercial Code argue that the seller who retains possession should not be considered bailee within Section 2–509. * * * The courts that have addressed this issue have agreed with White and Summers. [Citations.] It is undisputed that the contract did not require or authorize shipment by carrier pursuant to Section [2–509(1)]; therefore, the residue section, subsection 3, is applicable: In any case not within subsection 1 or 2, the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery. Martin admits that he is not a merchant; therefore, it is necessary to determine if Martin tendered delivery of the trade-in unit to Melland’s. * * * It is clear that the trade-in unit was not tendered to Melland’s in this case. The parties agreed that Martin would keep the old unit “until they had the new one ready.” * * * We hold that Martin did not tender delivery of the trade-in truck and haystack mover to Melland’s pursuant to [UCC §2–509]; consequently, Martin must bear the loss. We affirm the district court judgment. *** Chapter Outcome *** Explain how bulk transfers concern creditors and how the Uniform Commercial Code attempts to regulate such transfers. 23-3 SALES OF GOODS IN BULK Bulk transfers occur where the entire or a major portion of inventory of a business is sold. Such sales are governed by Article 6 of the Code. If a merchant attempts a bulk transfer without giving his creditors notice, the transferred goods remain subject to claims by the unpaid creditors, except where the transferee has sold them to a bona fide purchaser for value. NOTE: See Figure 23–5: Passage of Risk of Loss in Absence of Breach Revised Article 6 was promulgated in response to the complaint that, compliance with the existing Article is time-consuming and expensive and the fact that it applies to transferors even in the absence of evidence of wrongdoing. At least 45 states have repealed Article 6; only a few states have adopted Revised Article 6. Chapter 24 PRODUCTS LIABILITY: WARRANTIES AND STRICT LIABILITY IN TORT Warranties Types of Warranties [24-1] Warranty of Title [24-1a] Express Warranties [24-1b] Creation Basis of Bargain Implied Warranties [24-1c] Merchantability Fitness for Particular Purpose Obstacles to Warranty Actions [24-2] Disclaimer of Warranties [24-2a] Express Exclusions Buyer's Examination or Refusal to Examine Federal Legislation Relating to Warranties of Consumer Goods Limitation or Modification of Warranties [24-2b] Privity of Contract [24-2c] Notice of Breach of Warranty [24-2d] Plaintiff's Conduct [24-2e] Strict Liability in Tort Requirements of Strict Liability [24-3] Merchant Sellers [24-3a] Defective Condition [24-3b] Manufacturing Defect Design Defect Failure to Warn Unreasonably Dangerous [24-3c] Obstacles to Recovery [24-4] Disclaimers and Notice [24-4a] Privity [24-4b] Plaintiff's Conduct [24-4c] Contributory Negligence Comparative Negligence Voluntary Assumption of the Risk Misuse or Abuse of the Product Subsequent Alteration [24-4d] Statute of Repose [24-4e] Limitations on Damages [24-4f] Restatement (Third) of Torts: Products Liability [24-5] Manufacturing Defect [24-5a] Design Defect [24-5b] Failure to Warn [24-5c] Cases in This Chapter Belden, Inc. v. American Electronic Components, Inc. In re L.B. Trucking, Inc. Womco, Inc. v. Navistar International Corporation O’Neil v. Crane Co. Kelso v. Bayer Corporation Greene v. Boddie-Noell Enterprises, Inc Chapter Outcomes After reading and studying this chapter, the student should be able to: • Identify and describe the types of warranties. • List and explain the various defenses that may be successfully raised to a warranty action. • Describe the elements of an action based on strict liability in tort. • List and explain the obstacles to an action based on strict liability in tort. • Compare strict liability in tort with the implied warranty of merchantability. TEACHING NOTES Modern methods of distributing goods, in which retailers are principally distributors of prepackaged, well- advertised goods has led to the inclusion of manufacturers and other suppliers in product liability coverage. In response to recent public clamor over product liability and the resulting high cost of liability insurance, nearly all the states have revised their tort law to make product liability lawsuits more difficult to win. The liability of manufacturers and sellers of goods for a defective product, or for its failure to perform adequately, may be based on one or more of the following: (1) negligence, (2) misrepresentation, (3) violation of statutory duty, (4) warranty, and (5) strict liability in tort. NOTE: The first three of these causes of actions are in earlier chapters. In this chapter, we will explore the last two. WARRANTIES A warranty obligates the seller to assure that the goods he sells will conform to certain qualities, characteristics, or conditions. A seller, however, is not required to warrant the goods; and, in general, he may, by appropriate words, disclaim (exclude) or modify a particular warranty or even all warranties. In bringing a warranty action, the buyer must prove that: (1) a warranty existed, (2) the warranty has been breached, (3) the breach of the warranty caused the loss suffered, and (4) notice of the breach of warranty was given to the seller. In a breach of warranty, the buyer may choose to reject or revoke acceptance of the goods. In either case, the buyer may recover a judgment against the seller for damages, including personal injury, damage to property, and economic loss. NOTE: Remedies for breach of warranty are discussed in detail in the next chapter. In this section, we will examine the various types of warranties and the obstacles to recovery for breach of warranty. *** Chapter Outcome *** Identify and describe the types of warranties. 24-1 TYPES OF WARRANTIES A warranty may arise out of the mere existence of a sale (a warranty of title), out of any affirmation of fact or promise made by the seller to the buyer (an express warranty), or out of the circumstances under which the sale is made (an implied warranty). 24-1a Warranty of Title A seller implicitly guarantees that good title is conveyed to the buyer. This includes warranting that the property is not subject to a lien or security interest. 24-1b Express Warranties Expressions by the seller regarding the quality or nature of the goods; may include facts, descriptions, promises or even a model or sample of the goods, and may be oral or in writing. Creation — It is not necessary that the seller have an intent to create an express warranty or use formal words such as “warrant” or “guarantee.” Sales talk, or rendering a non-expert opinion, is not normally considered to be factual and will not create an express warranty. Expression of value based on fact, such as the price previously paid for the merchandise, does create an express warranty. Even if a seller does not know of the falsity of a statement she makes, she may still be liable for breach; however, to prove fraud on the part of the seller, the buyer would have to demonstrate both intent and knowledge of falsity. CISG — Seller must deliver goods that conform to the quality and description in the contract; goods must possess the qualities of any samples or model used by the seller. Basis of Bargain — The Code does not require that the buyer rely on the expression, it matters only that the warranty was part of the basis of the bargain. CASE 24-1 BELDEN INC. V. AMERICAN ELECTRONIC COMPONENTS, INC. Court of Appeals of Indiana, 2008 885 N.E.2d 751, 66 UCC Rep.Serv.2d 399 http://scholar.google.com/scholar_case?q=885+N.E.2d+751&hl=en&as_sdt=2,34&case=6981122239976535930&scilh=0 Barnes, J. Belden, Inc., and Belden Wire & Cable Company (collectively “Belden”) * * * manufactures wire, and [American Electronic Components, Inc.] AEC manufactures automobile sensors. Since 1989, AEC, in repeated transactions, has purchased wire from Belden to use in its sensors. In 1996 and 1997, Belden sought to comply with AEC’s quality control program and provided detailed information to AEC regarding the materials it used to manufacture its wire. In its assurances, Belden indicated that it would use insulation from Quantum Chemical Corp. (“Quantum”). In June 2003, however, Belden began using insulation supplied by Dow Chemical Company (“Dow”). The Dow insulation had different physical properties than the insulation provided by Quantum. In October 2003, Belden sold AEC wire manufactured with the Dow insulation. AEC used this wire to make its sensors, and the insulation ultimately cracked. Chrysler had installed AEC’s sensors containing the faulty wire in approximately 18,000 vehicles. Chrysler recalled 14,000 vehicles and repaired the remaining 4,000 prior to sale. Pursuant to an agreement with Chrysler, AEC is required to reimburse Chrysler for expenses associated with the recall. In 2004, AEC filed a complaint against Belden seeking consequential damages for the changes in the insulation that resulted in the recall. In 2005, AEC filed a partial motion for summary judgment. In 2006, Belden responded and filed a cross-motion for summary judgment. * * * On July 6, 2007, the trial court entered an order granting AEC’s motion for partial summary judgment and denying Belden’s cross-motion. Belden now appeals. * * * “Where an agreement is entirely in writing, the question of whether express warranties were made is one for the court.” [Citation.] More specifically, if all of the representations upon which the parties rely were in writing, the existence of express warranties is a question of law. [Citation.] Because the alleged warranty is based on written exchanges, whether the writings are sufficient to create an express warranty is a question of law appropriate for summary judgment. * * * Belden claims that these 1996 and 1997 communications did not amount to an express warranty for purposes of the October 2003 contract. Section 2–313 of the UCC provides: (1) Express warranties by the seller are created as follows: (a) any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. (b) any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description. (c) any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model. (2) It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty. “An express warranty requires some representation, term or statement as to how the product is warranted.” [Citation.]. There does not seem to be a dispute that in 1996 and 1997 Belden made express warranties regarding its wire. Instead, the issue is whether the 1996 and 1997 statements by Belden regarding certification created an express warranty that extended to the October 2003 contract. Based on the designated evidence, we believe Belden’s compliance with AEC’s quality control program was essential to its contracts with AEC and was intended to extend to the parties’ repeated contracts. First, Comment 7 to Section 2–313 provides in part, “The precise time when words of description or affirmation are made or samples are shown is not material. The sole question is whether the language or samples or models are fairly to be regarded as part of the contract.” Thus, although Belden made its initial representations in 1996 and 1997, there is no indication that those representations were limited in time, that Belden subsequently disclaimed its compliance with AEC’s quality control standards, or that AEC changed those standards. As the trial court observed, “it is illogical to believe that [AEC] intended to rely in this representation for only one (1) shipment of Wire and then to understand that Belden would follow whatever quality procedures it wanted as to future shipments.” Further, Comment 5 of Section 2–213 provides in part, “Past deliveries may set the description of quality, either expressly or impliedly by course of dealing. Of course, all descriptions by merchants must be read against the applicable trade usages with the general rules as to merchantability resolving any doubts.” Belden claims that if the parties’ course of dealing was insufficient to incorporate the limitation on damages into the parties’ contract, then the course of dealing is also insufficient to establish an express warranty. We disagree. Irrespective of whether the course of dealing established that AEC assented to Belden’s proposed limitation on damages, the parties’ course of dealing established that Belden made an express warranty regarding its compliance with the quality control standards. The limitation on damages and the express warranty are unrelated issues-there is no correlation between the two. A course of dealing is conduct “fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.” § 1-205(1). It is undisputed that Belden’s wire complied with the AEC’s quality control requirements for the parties’ more than 100 transactions, until October 2003, when Belden switched from Quantum insulation to the Dow insulation without informing AEC of the changes. * * * That Belden and AEC did not repeatedly or routinely “communicate” regarding Belden’s continued use of Quantum insulation does not undermine the parties’ course of dealing. The very point of a course of dealing is to allow the parties’ prior actions create a basis of common understanding. This is exactly what Belden’s 1996 and 1997 assertions taken with its continued use of Quantum insulation did. * * * Affirmed. 24-1c Implied Warranties Implied warranties are not created by expressions of the seller like express warranties; rather, the Code makes implied warranty implicit in the transaction in order to provide protection to the buyer. An implied warranty arises out of the circumstances under which the parties enter into their contract and is simply an operation of law. Merchantability — The implied warranty of merchantability guarantees that the product will be fit for the ordinary purpose for which it was intended. CISG — The seller must deliver goods, unless otherwise agreed, that are fit for the purposes for which goods of the same description would ordinarily be used. Fitness for Particular Purpose — The implied warranty of fitness for a particular purpose requires that if a seller, including merchants and nonmerchants alike, sells a product for a particular purpose intended by the buyer, an implied warranty is created if the buyer relies on the seller’s special skill and judgment. Note that reliance by the buyer on the seller’s skill and judgment is critical to establishing the existence of this warranty. CISG — The seller must deliver goods, unless otherwise agreed, that are fit for any particular purpose made known by the buyer, except where the buyer did not rely on the seller’s skill and judgment or where it was unreasonable for the buyer to rely on the seller. CASE 24-2 IN RE L.B. TRUCKING, INC. United States Bankruptcy Court, D. Del, 1994 163 BR 709, 23 U.C.C. Rep.Serv.2d 1092 http://scholar.google.com/scholar_case?case=6401409485061780661&q=163+BR+709&hl=en&as_sdt=2,34 Balick, J. [Dudley B. Durham, Jr., and his wife, Barbara ¬Durham, owned and operated a trucking company, L. B. Trucking, Inc., and a farm, Double-D Farms, Inc. In April 1983, Dudley Durham met with Richard Thomas of Southern States Cooperative—which is in the business of supplying various agricultural supplies to farmers—about arranging for the application of herbicides to the Durhams’ fields. At a subsequent meeting in early May, Durham met with Thomas to complete credit arrangements and to arrange the application of herbicides. Durham told Thomas, “I want it done the cheapest way, the best way it can be done.” Thomas responded, “Will do.” Thomas then outlined with some specificity the chemicals he proposed to use on the Durhams’ fields. The plan included the use of a water-based carrier that was recommended by local experts, rather than a more expensive nitrogen solution. Durham had no experience or expertise on herbicidal chemicals and relied on Thomas’s briefing on the various herbicide mixtures in choosing which ones to apply. When the herbicides were actually to be applied, Southern States herbicide applicator, Gilbert McClements, received from Mr. Thomas instructions concerning which chemicals to apply and would mix the chemicals each day prior to spraying. Apparently, though, Mr. McClements used a nitrogen solution to prepare the herbicides and did not make extensive prespraying inspections of the grass and weeds in the fields to be sprayed. When Durham noticed a significant number of weeds and grasses had survived the herbicidal treatment, he promptly notified Southern States. Southern States attempted to remedy the problem, but the harvest was dismal and far below the county average. In 1983, the Durhams and both their businesses filed for bankruptcy. Southern States brought a claim against the consolidated bankruptcy estate to collect payment for the herbicides as well as application and other services provided. The trustee of the estate asserted counterclaims against Southern States for negligence and breach of warranties in the application of herbicides that caused severe damage to the Durhams’ 1983 crop.] * * * 1. Express Warranty An express warranty may be created by a seller through: (1) any affirmation of fact or promise to the buyer relating to the goods which becomes the basis of the bargain so that the goods conform to the affirmation or promise; (2) any description of the goods which is made part of the basis of the bargain so that the whole of the goods conform to the sample of model. UCC §2–313(1)(a)–(c). The question of whether an express warranty has been made in a particular transaction is for the trier of fact. [Citation.] In the case at bar, there are no written express warranties claimed, but instead, oral statements made principally by the Middletown store manager, Thomas, to Durham which the Trustee contends were express warranties. The relevant testimony concerning Thomas’ statements to Durham reveal several oral express warranties concerning the herbicides and their application which Southern States plainly breached. First, Thomas stated that water would be the carrier for the herbicides, especially since Durham wanted the job done inexpensively. In its application, Southern States used the nitrogen solution regardless of the University of Delaware recommendations dissuading its use and despite the fact that it is more expensive than using water as a carrier. Southern States’ reference to the common trade usage of nitrogen in 1983 is inapposite in an action for breach of express warranty because it is the affirmation or promise—not the custom or trade usage—which becomes the standard against which a breach is determined. In addition, Thomas’ statements were more than “seller’s talk” or puffing in that they were product-specific and not overly broad or vague. Second, Thomas also made statements regarding the effectiveness of the herbicides in removing weeds and grass so as to promote successful no-till farming. The purchase of herbicides is characteristically the subject of express warranties because the buyer of the product cannot determine its effectiveness prior to use and evaluate its effectiveness in a given situation. Here, Thomas’ statements in early May of 1983 were part of the basis of the bargain upon which Durham relied when purchasing the herbicides. Beyond this, Thomas had superior knowledge about the herbicides as opposed to Durham who had little or none. Consequently, Thomas’ selection of herbicidal recipes combined with his statements as to their effectiveness amounted to an express warranty that the respective mixtures would do the job adequately. Thomas made at least two express warranties which formed the basis of Durham’s purchase of the chemicals and were ultimately breached. The liability for breach of express warranty is a strict liability. No defect need be shown other than breach of the warranty itself which is the proximate cause of the property damage. [Citations.] Accordingly, the court finds that Southern States breached its express warranty to Durham and, thus, is liable for the Durham’s crop damage. * * * 2. Implied Warranties There are two theories of recovery for breach of implied warranty under the Delaware UCC: breach of implied warranty of merchantability under UCC §2–314 and breach of implied warranty of fitness for a particular purpose under UCC §2–315. The implied warranty of fitness for a particular purpose may, to some degree, overlap a seller’s express warranty. [Citations.] Unless there is a valid disclaimer, these implied warranties are implied in every sales transaction involving goods and run not only to those in contractual privity with the seller but to third party beneficiaries as well. UCC §2–318; [Citation]. Obviously, Durham was in direct privity with Southern States regarding the herbicides sale. Turning first to the implied warranty of merchantability, there are five elements which the claimant must establish: (1) that a merchant sold goods, (2) which were not merchantable at the time of sale, (3) proximately causing by the defective nature of the goods, (4) injury and damages to the claimant or his property, and (5) notice to the seller of the injury. [Citation.] As to the element requiring the seller to be a merchant, there is no doubt that Southern States was a merchant. * * * Addressing the second element concerning whether the herbicides were “merchantable,” the goods must pass without objection in the trade under the contract description be fit for the ordinary purposes for which it was intended. UCC §2–314(2)(a) and (c). The facts show that Southern States sprayed (and in some instances resprayed) the various Durham farm tracts with herbicidal and other chemicals in order to increase the crop yields. Nevertheless, the farms’ respective crop yields did not improve, but rather fell dramatically as the result of the chemical applications. Specifically, the herbicidal recipes were unfit for the ordinary purpose for which they were intended to be used, chemical agents that would kill weeds without damaging the primary crops. [Citation.] The chemicals did not operate for their ordinary purpose which was to promote no-till farming which is why Durham purchased them in the first place. * * * As for proximate cause and damages, the court finds that these elements have been met. * * * Finally, the notice requirement for a breach of implied warranty of merchantability cause of action was plainly met. Durham notified Southern States as soon as he suspected that the herbicides were failing to work just a few weeks after their application. * * * Southern States also breached the implied warranty that the herbicides were fit for their particular purpose. * * * The breach of this warranty is the one most apparent on the facts. As indicated earlier, Durham relied on Thomas’ skill and judgment in selecting suitable herbicides to conduct no-till farming on his farms. The chemicals were mixed by Southern States’ herbicide applicator, McClements, before each job based on a formula or recipe provided by Thomas or some other Southern States official. The herbicides did not effectively do their job of keeping the fields clear of weeds and the crops died. Though thoroughly familiar with till farming, Durham had no experience with the no-till farming method and, therefore, was not a “sophisticated purchaser” who might have been able to recognize mistakes made by Southern States’ personnel. As a result, the herbicides’ failure to do their intended task coupled with Durham’s reliance on Southern States’ judgment and skill in formulating, mixing, and applying the herbicidal chemicals breached the implied warranty of fitness. [Citations.] Accordingly, Southern States is found to be liable under U.C.C. §2–315. *** Chapter Outcome *** List and explain the various defenses that may be successfully raised to a warranty action. 24-2 OBSTACLES TO WARRANTY ACTIONS Technical obstacles which limit the use of a warranty as a way for a buyer to recover loss or damages include disclaimers of warranties, limitations or modifications of warranties, privity, notice of breach, and the conduct of the plaintiff. 24-2a Disclaimer of Warranties A disclaimer (negation of warranty) must be positive, explicit, unequivocal, and conspicuous. Express Exclusions — In general, a seller cannot provide an express warranty and then disclaim it. A seller can, however, carefully refrain from making an express warranty by not making any promises, not describing the goods, or not using a sample or model in a sale. To exclude or to modify: A warranty of title may be excluded only by specific language or by certain circumstances, including judicial sales or sales by sheriffs, executors, or foreclosing lienors. Section 2–312(2); Section 2A–214(4). In the latter cases the seller is manifestly offering to sell only such right or title as he or a third person might have in the goods, as it is apparent that the goods are not the property of the person selling them. In an implied warranty of merchantability, the language of disclaimer or modification must mention merchantability and, in the case of a writing, must be conspicuous. For an implied warranty of fitness for the particular purpose of the buyer, the disclaimer must be in writing and conspicuous. Buyer’s Examination or Refusal to Examine — If the buyer inspects the goods, implied warranties do not apply to obvious defects that are apparent on examination. The warranties also do not apply where the buyer has refused to examine the goods or where the examination should have revealed the obvious defects. CISG — If buyer knows of lack of conformity upon entering the contract, the seller is not liable for the warranty of particular purpose, ordinary purpose or sale by sample or model. CASE 24-3 WOMCO, INC. V. NAVISTAR INTERNATIONAL CORPORATION Court of Appeals of Texas, Twelfth District, Tyler, 2002 84 S.W.3d 272, 48 U.C.C. Rep.Serv.2d 130 http://scholar.google.com/scholar_case?case=377667224667598367&q=84+S.W.3d+272&hl=en&as_sdt=2,22 Griffith, J. [In 1993, Womco, Inc. purchased through Price, a dealer, thirty 1993 International model 9300 tractor trucks manufactured by Navistar. Also, in 1993, C. L. Hall purchased sixteen 1994 International model 9300 tractor trucks also manufactured by Navistar through Mahaney, another dealer. Almost immediately after the trucks were put into service, Womco and Hall (plaintiffs) each had problems with their trucks’ engines overheating. As the problems occurred, plaintiffs took their trucks, which were still covered under warranty, to their dealerships for service related to the overheating problem. Although repeated attempts were made, the dealerships were unable to correct the problem. Subsequently it was discovered that the trucks’ radiators were unusually small and were insufficient to cool the engine. Womco and Hall filed suit against Navistar, Price, and Mahaney (defendants). The trial court granted the defendants’ motion for summary judgment based on their affirmative defenses of disclaimer of warranty. Womco and Hall appealed.] * * * It is undisputed that Appellants’ breach of implied warranty claims as to nine trucks are not barred by limitations. However, * * * Appellees contend that such implied warranties were disclaimed. The Texas Uniform Commercial Code allows sellers to disclaim both the implied warranty of merchantability as well as the implied warranty of fitness for particular purpose. [UCC] §2.316(b), [citation]. In order to disclaim an implied warranty of merchantability in a sales transaction, the disclaimer must mention the word “merchantability.” The disclaimer may be oral or written, but if in writing, the disclaimer must be conspicuous. [Citation]; [UCC] §2.316(b). To disclaim an implied warranty of fitness for a particular purpose, the disclaimer must be in writing and must be conspicuous. [UCC] §2.316(b); [citation]. Whether a particular disclaimer is conspicuous is a question of law to be determined by the court. [Citation.] A term or clause is conspicuous if it is written so that a reasonable person against whom it is to operate ought to have noticed it. [UCC] §1.201(10) (Vernon Supp. 2002); [citation]. Language is “conspicuous” if it is in larger type or other contrasting font or color. [Citation.] Conspicuousness is not required if the buyer has actual knowledge of the disclaimer. [Citation.] * * * Further, Appellants argue that Appellees were required to offer proof of the context of the purported disclaimers, contending that in order for a disclaimer of an implied warranty to be effective, the plaintiffs must have had an opportunity to examine it prior to consummation of the contract for sale. [Citation.] * * * In Dickenson, [citation], the court held that a disclaimer of an express warranty was ineffective where the buyer was not given the opportunity to read the warranty or warranties made until after the contract is signed. Although the instant case concerns a converse situation to Dickenson, the rationale applied by the Dickenson court is helpful. One of the underlying purposes of [UCC] section 2.316 is to protect a buyer from surprise by permitting the exclusion of implied warranties. [UCC] §2.316, comment 1. We fail to see how section [UCC] 2–316 can fulfill such a purpose unless a disclaimer is required to be communicated to the buyer before the contract of sale has been completed, unless the buyer afterward agrees to the disclaimer as a modification of the contract. [Citations.] In support of their motion for summary judgment, Appellees offered six disclaimers, all of which were deposition exhibits. None of these six disclaimers is probative as to the issue of whether the disclaimer was communicated prior to the completion of the contract of sale. * * * Therefore, we hold that since Appellant failed to conclusively prove that they were entitled to judgment as a matter of law on the disclaimer issue, summary judgment was not appropriate on that issue. * * * * * * Accordingly, the trial court’s order granting summary judgment is reversed as to Appellants’ claims for breach of warranty * * * and is remanded to the trial court for further proceedings. As to all other claims of Appellants, the trial court’s order granting summary judgment is affirmed. Federal Legislation Relating to Warranties of Consumer Goods — Congress enacted the Magnuson-Moss Warranty Act to protect purchasers of consumer goods. Obvious defects or those defects which would have been discovered in an inspection are not covered by the implied warranties. Also, the act provides that a seller who makes a written warranty cannot disclaim any implied warranty. The Federal Trade Commission has established guidelines for the type of consumer product warranty information a seller must supply. 24-2b Limitation or Modification of Warranties If not unconscionable, the parties may by contract limit or modify warranties or impose time limits within which the warranty is effective. One important exception to this right is the prohibition against “unconscionable” limitations or exclusions of consequential damages. Specifically, the limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable 24-2c Privity of Contract Common law required that the plaintiff have a contractual relationship with the defendant in order to pursue a breach of warranty action. This relationship is known as privity of contract. Horizontal privity refers to noncontracting parties injured by defective goods. The Code relaxes the requirements for determining to whom horizontal privity extends. In addition, the UCC provides three alternatives which are available for adoption by the states. A) warranty extends to buyer’s family and household guests B) warranty extends to any person who may reasonably be expected to use the goods C) warranty extends to artificial entities such as corporations. Most states have, for all practical purposes, eliminated horizontal privity in warranty cases. Vertical privity refers to all those involved in the manufacturing and distribution process. Although the Code adopts a neutral position regarding vertical privity, the courts in most states have eliminated the requirement of vertical privity in warranty actions. 24-2d Notice of Breach of Warranty The buyer must notify the seller of any warranty breach within a reasonable time or she will not be permitted a recovery. In determining a reasonable period of time, commercial standards apply to a merchant buyer while more lenient standards apply to a retail consumer. 24-2e Plaintiff’s Conduct Contributory and comparative negligence are tort defenses and usually cannot be used as a defense to a breach of warranty action. Voluntary assumption of the risk is a defense if the buyer is aware of defects in the product and continues to use it. NOTE: Contributory and comparative negligence are both discussed later in this chapter. STRICT LIABILITY IN TORT Section 402A of the Restatement, Second, of Torts imposes strict liability in tort on merchant sellers for both personal injuries and property damage that result from selling a product in a defective condition, which makes the product unreasonably dangerous to the user or consumer. Strict liability actions focus on the product, not on the conduct of the manufacturer, and do not require the plaintiff to prove that the defect resulted from negligence of the seller. *** Chapter Outcome *** Describe the elements of an action based on strict liability in tort. 24-3 REQUIREMENTS OF STRICT LIABILITY IN TORT Section 402A imposes strict liability in tort if: (1) the defendant was engaged in the business of selling; (2) the defendant sold the product in a defective condition; (3) the defect made the product unreasonably dangerous; (4) the defect existed at the time it left the defendant’s hands; (5) the plaintiff sustained physical harm or property damage by use or consumption of the product; and (6) the defect was the proximate cause of the injury or damage. This liability: • does not depend on contract, either express or implied • does not require reliance on warranty statements • is not limited to persons in a buyer-seller relationship • is generally not subject to disclaimer, exclusion, or modification by contractual agreement. The majority of courts have held that Section 402A imposes liability only for injury to person and damage to property, not for commercial loss. 24-3a Merchant Sellers The Restatement 2nd of Torts imposes liability only on one who is in the business of selling the product involved. Some jurisdictions are including merchant-sellers of used goods, but not the occasional seller. 24-3b Defective Condition The plaintiff must prove that the product was defective when purchased and that she did not substantially alter the product subsequent to purchasing it from the seller. Manufacturing Defect — Manufacturing defects result from failure to follow the manufacturing specifications. Design Defect — A design defect is created by inadequate plans or specifications, such as deficient engineering or selection of materials. Failure to Warn — Where use of a product gives rise to a foreseeable danger of physical injury without adequate instructions or warning, the seller has a duty to warn. If a product is dangerous it will be held to be defective absent a warning where it can be shown that a superior design or production process existed. CASE 24-4 O'NEIL v. CRANE CO. Supreme Court of California, 2012 53 Cal.4th 335, 135 Cal.Rptr.3d 288, 266 P.3d 987 http://scholar.google.com/scholar_case?q=O%27Neil+v.+Crane+Co&hl=en&as_sdt=2,21&case=2363858414015569521&scilh=0 Corrigan, J. Defendants Crane Co. (Crane) and Warren Pumps LLC (Warren) made valves and pumps used in Navy warships. They were sued here for a wrongful death allegedly caused by asbestos released from external insulation and internal gaskets and packing, all of which were made by third parties and added to the pumps and valves postsale. It is undisputed that defendants never manufactured or sold any of the asbestos-containing materials to which plaintiffs' decedent was exposed. Nevertheless, plaintiffs claim defendants should be held strictly liable *** because it was foreseeable workers would be exposed to and harmed by the asbestos in replacement parts and products used in conjunction with their pumps and valves. * * * Following the close of evidence, Crane moved for nonsuit on all causes of action. * * * The trial court granted the motions and dismissed all claims against Crane and Warren. * * * On appeal, this decision was reversed. * * * We granted review and now reverse. * * * Strict liability has been imposed for three types of product defects: manufacturing defects, design defects, and “‘warning defects.'" [Citation.] The third category describes "products that are dangerous because they lack adequate warnings or instructions." [Citation.] A bedrock principle in strict liability law requires that "the plaintiff's injury must have been caused by a ‘defect’ in the [defendant's] product." [Citation.] Plaintiffs argue defendants' products were defective because they included and were used in connection with asbestos-containing parts. They also contend defendants should be held strictly liable for failing to warn O'Neil about the potential health consequences of breathing asbestos dust released from the products used in connection with their pumps and valves. These claims lack merit. We conclude that defendants were not strictly liable for O'Neil's injuries because (a) any design defect in defendants' products was not a legal cause of injury to O'Neil, and (b) defendants had no duty to warn of risks arising from other manufacturers' products. A. No Liability Outside a Defective Product's Chain of Distribution From the outset, strict products liability in California has always been premised on harm caused by deficiencies in the defendant's own product. We first announced the rule in Greenman v. Yuba Power Products, Inc. (1963) (Greenman) [citation]: "A manufacturer is strictly liable in tort when an article he places on the market, knowing that it is to be used without inspection for defects, proves to have a defect that causes injury to a human being." (Italics [in original].) We explained that "[t]he purpose of such liability is to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves." [Citation.] A year later, we extended strict liability to retailers, reasoning that, as an "integral part of the overall producing and marketing enterprise," they too should bear the cost of injuries from defective products. [Citations.] Strict liability encompasses all injuries caused by a defective product, even those traceable to a defective component part that was supplied by another. [Citation.] However, the reach of strict liability is not limitless. We have never held that strict liability extends to harm from entirely distinct products that the consumer can be expected to use with, or in, the defendant's nondefective product. Instead, we have consistently adhered to the Greenman formulation requiring proof that the plaintiff suffered injury caused by a defect in the defendant's own product. [Citation.] Regardless of a defendant's position in the chain of distribution, "the basis for his liability remains that he has marketed or distributed a defective product" [citation], and that product caused the plaintiff's injury. * * * In this case, it is undisputed that O'Neil was exposed to no asbestos from a product made by defendants. Although he was exposed to potentially high levels of asbestos dust released from insulation the Navy had applied to the exterior of the pumps and valves, Crane and Warren did not manufacture or sell this external insulation. They did not mandate or advise that it be used with their products. O'Neil was also exposed to asbestos from the replacement gaskets and packing inside the pumps and valves. Yet, uncontroverted evidence established that these internal components were not the original parts supplied by Crane and Warren. They were replacement parts the Navy had purchased from other sources. It is fundamental that the imposition of liability requires a showing that the plaintiff's injuries were caused by an act of the defendant or an instrumentality under the defendant's control. [Citation.] *** Nor does the record support plaintiffs' claim that defendants' products were defective because they were "designed to be used" with asbestos-containing components. The products were designed to meet the Navy's specifications. Moreover, there was no evidence that defendants' products required asbestos-containing gaskets or packing in order to function. Plaintiffs' assertion to the contrary is belied by evidence that defendants made some pumps and valves without asbestos-containing parts. As alternative insulating materials became available, the Navy could have chosen to replace worn gaskets and seals in defendants' products with parts that did not contain asbestos. Apart from the Navy's specifications, no evidence showed that the design of defendants' products required the use of asbestos components, and their mere compatibility for use with such components is not enough to render them defective. * * * B. No Duty to Warn of Defects in Another Manufacturer's Product Plaintiffs also argue that defendants had a duty to warn O'Neil about the hazards of asbestos because the release of asbestos dust from surrounding products was a foreseeable consequence of maintenance work on defendants' pumps and valves. "Generally speaking, manufacturers have a duty to warn consumers about the hazards inherent in their products. [Citation.] The requirement's purpose is to inform consumers about a product's hazards and faults of which they are unaware, so that they can refrain from using the product altogether or evade the danger by careful use. [Citation.] Typically, under California law, we hold manufacturers strictly liable for injuries caused by their failure to warn of dangers that were known to the scientific community at the time they manufactured and distributed their product. [Citations.]" [Citation.] However, we have never held that a manufacturer's duty to warn extends to hazards arising exclusively from other manufacturers' products. A line of Court of Appeal cases holds instead that the duty to warn is limited to risks arising from the manufacturer's own product. * * * So too here. Crane and Warren gave no warning about the dangers of asbestos in the gaskets and packing originally included in their products. However, O'Neil never encountered these original parts. His exposure to asbestos came from replacement gaskets and packing and external insulation added to defendants' products long after their installation on the [U.S. Navy vessel]. There is no dispute that these external and replacement products were made by other manufacturers. "[N]o case law ... supports the idea that a manufacturer, after selling a completed product to a purchaser, remains under a duty to warn the purchaser of potentially defective additional pieces of equipment that the purchaser may or may not use to complement the product bought from the manufacturer." [Citation.] Decisions from other jurisdictions are in accord. [Citations.] *** * * * *** California law does not impose a duty to warn about dangers arising entirely from another manufacturer's product, even if it is foreseeable that the products will be used together. Were it otherwise, manufacturers of the saws used to cut insulation would become the next targets of asbestos lawsuits. *** Where the intended use of a product inevitably creates a hazardous situation, it is reasonable to expect the manufacturer to give warnings. Conversely, where the hazard arises entirely from another product, and the defendant's product does not create or contribute to that hazard, liability is not appropriate. We have not required manufacturers to warn about all foreseeable harms that might occur in the vicinity of their products. "From its inception, ... strict liability has never been, and is not now, absolute liability. As has been repeatedly expressed, under strict liability the manufacturer does not thereby become the insurer of the safety of the product's user. [Citations.]" [Citation.] We reaffirm that a product manufacturer generally may not be held strictly liable for harm caused by another manufacturer's product. The only exceptions to this rule arise when the defendant bears some direct responsibility for the harm, either because the defendant's own product contributed substantially to the harm or because the defendant participated substantially in creating a harmful combined use of the products [Citation.] The decision of the Court of Appeal is reversed, and the case is remanded for entry of a judgment of nonsuit in favor of defendants. CASE 24-5 KELSO V. BAYER CORPORATION United States Court of Appeals, Seventh Circuit, 2005 398 F.3d 640 http://scholar.google.com/scholar_case?case=13341242500313047129&q=398+F.3d+640&hl=en&as_sdt=2,22 Manion, J. Ted Kelso sued Bayer Corporation for strict product liability, alleging that the warning Bayer provided on its Neo-Synephrine 12 Hour Extra Moisturizing Spray was defective. * * * Ted Kelso began using Neo-Synephrine 12 Hour Extra Moisturizing Spray in 1990. He used Neo- Synephrine continuously for more than three years. After learning that his continued use of the product caused permanent nasal tissue damage requiring multiple sinus surgeries, he sued Bayer, the manufacturer of Neo-Synephrine, alleging Bayer failed to adequately warn him of the dangers associated with Neo- Synephrine. Bayer moved for summary judgment, arguing that the warning it provided, as follows, was adequate, as a matter of law: “Do not exceed recommended dosage.” * * * “Stop use and ask a doctor if symptoms persist. Do not use this product for more than 3 days. Use only as directed. Frequent or prolonged use may cause nasal congestion to recur or worsen.” The district court agreed and granted Bayer summary judgment. Kelso appeals. * * * Kelso argues that summary judgment was inappropriate because he presented sufficient evidence to recover in a product liability action against Bayer. “To recover in a product liability action, a plaintiff must plead and prove that the injury resulted from a condition of the product, that the condition was an unreasonably dangerous one, and that the condition existed at the time the product left the manufacturer’s control.” [Citation.] A product may be unreasonably dangerous because of a design defect, a manufacturing defect, “or a failure of a manufacturer to warn of a danger or instruct on the proper use of the product as to which the average consumer would not be aware.” [Citation.] Kelso claims the Neo-Synephrine was unreasonably dangerous because Bayer’s warning was confusing as to whether or not the product could be used safely for more than three days, when such use was effective in relieving his congestion. * * * Kelso * * * interpreted the warning as meaning not to exceed three days use if the product failed to relieve the congestion; he only needed to see a physician if the product did not work to relieve the congestion. Also, because the container included much more than three days’ dosage, Kelso insists that he had good reason to believe that he could safely use Neo-Synephrine for more than three days. However, Kelso’s personal reaction to the warning is not the test. Whether a warning is sufficient “is determined using an objective standard, i.e., the awareness of an ordinary person.” [Citation.] Here, the plain, clear and unambiguous language of the warning states: “Do not use this product for more than 3 days.” Period. That the Neo- Synephrine container included doses sufficient to treat multiple users or multiple colds in no way takes away from the clear impact of the warning. Moreover, the warning clearly informs users to: “Stop use and ask a physician if symptoms persist.” The warning was clear. Yet Kelso continued using the product well beyond the three days. It is unreasonable to create an ambiguity that excuses extended use when the warning against such use is unequivocal. Kelso also argues that the warning was inadequate because it did not warn users that the product could also cause permanent nasal tissue damage and also had a risk of habituation (meaning that users would become dependent on the product, causing them to use the product for more than three days). However, under Illinois law, a manufacturer need not warn of all possible consequences of failing to follow a primary warning. [Citation.] Here, the primary warning told consumers “not [to] use this product for more than 3 days.” That was sufficient under Illinois law. However, Bayer’s warning went even further, informing consumers of the consequence of extended use, stating: “[f]requent or prolonged use may cause nasal congestion to recur or worsen.” Although Kelso believes the warning should have provided him with more detailed information, Illinois law does not require more. [Citation.] Therefore, Kelso’s defective warning claim fails. 24-3c Unreasonably Dangerous Section 402A covers those products that are unreasonably dangerous because of the defect, i.e., the danger goes beyond that to be reasonably assumed by the ordinary buyer. CASE 24-6 GREENE V. BODDIE-NOELL ENTERPRISES, INC. United States District Court, W.D. Virginia, 1997 966 F.Supp. 416 http://scholar.google.com/scholar_case?case=14855332202624539345&q=966+F.Supp.+416&hl=en&as_sdt=2,34 Jones, J. In this products liability case, the plaintiff contends that she was badly burned by hot coffee purchased from the drive-through window of a fast food restaurant, when the coffee spilled on her after it had been handed to her by the driver of the vehicle. The defendant restaurant operator moves for summary judgment on the ground that the plaintiff cannot show a prima facie case of liability. I agree, and dismiss the case. * * * [Plaintiff, Katherine] Greene was a passenger in a car driven by her boyfriend, Chris Blevins, on the morning of December 31, 1994, when he purchased food and drink [coffees] from the drive-through window of the Hardee’s restaurant in Wise, Virginia, operated by the defendant. * * * He immediately handed the food and beverages to Greene. The food was on a plate, and the beverages were in cups. Greene placed the plate on her lap and held a cup in each hand. According to Greene, the Styrofoam coffee cup was comfortable to hold, and had a lid on the top, although she did not notice whether the lid was fully attached. Blevins drove out of the restaurant parking lot, and over a “bad dip” at the point at which the lot meets the road. When the front tires of the car went slowly across the dip, the coffee “splashed out” on Greene, burning her legs through her clothes. Blevins remembers Greene exclaiming, “the lid came off.” She did not look at the cup until the coffee burned her, and does not know whether the cup was tilted in one direction or another when the coffee spilled out. As soon as the coffee burned her, Greene threw the food and drink to the floor of the car, and in the process stepped on the coffee cup. When the cup was later retrieved from the floor of the car, the bottom of the cup was damaged, and the lid was at least partially off of the top of the cup. After Greene was burned by the coffee, Blevins drove her to the emergency room of a local hospital, where she was treated. She missed eleven days of work, and suffered permanent scarring to her thighs. Both Greene and Blevins testified that they had heard of the “McDonalds’ coffee case” prior to this incident and Greene testified that while she was not a coffee drinker, she had been aware that if coffee spilled on her, it would burn her. After the accident, Greene gave a recorded statement to a representative of the defendant in which she stated, “I know the lid wasn’t on there good. It came off too easy.” [Court’s footnote: On August 17, 1994, a state court jury in Albuquerque, New Mexico, awarded 81-year old Stella Liebeck $160,000 in compensatory damages and $2.7 million in punitive damages, after she was burned by coffee purchased from a drive-through window at a McDonalds restaurant. The trial judge later reduced the punitive damages to $480,000, and the parties settled the case before an appeal. According to news reports, Mrs. Liebeck contended that for taste reasons McDonalds served coffee about 20 degrees hotter than other fast food restaurants, and in spite of numerous complaints, had made a conscious decision not to warn customers of the possibility of serious burns. The jury’s verdict received world-wide attention. See Andrea Gerlin, A Matter of Degree: How a Jury Decided That One Coffee Spill Is Worth $2.9 Million, Wall Street Journal.] * * * To prove a case of liability in Virginia, a plaintiff must show that a product had a defect which rendered it unreasonably dangerous for ordinary or foreseeable use. [Citation]. In order to meet this burden, a plaintiff must offer proof that the product violated a prevailing safety standard, whether the standard comes from business, government or reasonable consumer expectation. [Citation.] Here the plaintiff has offered no such proof. There is no evidence that either the heat of the coffee or the security of the coffee cup lid violated any applicable standard. Do other fast food restaurants serve coffee at a lower temperature, or with lids which will prevent spills even when passing over an obstruction in the road? Do customers expect cooler coffee, which may be less tasty, or cups which may be more secure, but harder to unfasten? In fact, the plaintiff testified that she knew, and therefore expected, that the coffee would be hot enough to burn her if it spilled. While she also expressed the opinion that the cup lid was too loose, that testimony does not substitute for evidence of a generally applicable standard or consumer expectation, since “[the plaintiffs] subjective expectations are insufficient to establish what degree of protection * * * society expects from [the product].” [Citation.] The plaintiff argues that the mere fact that she was burned shows that the product was dangerously defective, either by being too hot or by having a lid which came off unexpectedly. But it is settled in Virginia that the happening of an accident is not sufficient proof of liability, even in products cases. [Citation.] This is not like the case of a foreign substance being found in a soft drink bottle, where a presumption of negligence arises. [Citation.] To be merchantable, a product need not be foolproof, or perfect. As one noted treatise has expressed, “[i]t is the lawyer’s challenging job to define the term ‘merchantability’ in [the] case in some objective way so that the court or jury can make a determination whether that standard has been breached.” [Citation.] In the present case, there has been no showing that a reasonable seller of coffee would not conclude that the beverage must be sold hot enough to be palatable to consumers, even though it is hot enough to burn other parts of the body. A reasonable seller might also conclude that patrons desire coffee lids which prevent spillage in ordinary handling, but are not tight enough to avert a spill under other circumstances, such as when driving over a bump. It was the plaintiff’s obligation to demonstrate that she had proof that the defendant breached a recognizable standard, and that such proof is sufficient to justify a verdict in her favor at trial. She has not done so, and accordingly the motion for summary judgment must be granted. *** Chapter Outcome *** List and explain the obstacles to an action based on strict liability in tort. 24-4 OBSTACLES TO RECOVERY Section 402A was drafted largely to avoid the obstacles commonly found in warranty actions. 24-4a Disclaimers and Notice Although strict liability law is not subject to the disclaimer and other contractual limitations provisions in the Code, most courts have permitted 402A disclaimers if they are clear and specific and involve commercial transactions between merchants of equal bargaining power. 24-4b Privity In horizontal privity, strict liability includes injured bystanders. In vertical privity 402A, liability extends to any seller engaged in the business of selling the product, including a wholesaler or distributor as well as the manufacturer and retailer. 24-4c Plaintiff’s Conduct Contributory Negligence — A seller cannot defend a strict liability lawsuit on the basis of a plaintiff’s negligent failure to discover a defect or to guard against its possibility. Comparative Negligence — There are two basic types in strict liability cases: 1) reduce the plaintiff’s recovery in proportion to her fault, whatever that may be; 2) (modified comparative responsibility) allows the plaintiff to recover according to the general principles of comparative responsibility unless she is more than 50%responsible for her own injuries. If her responsibility exceeds 50%, she recovers nothing. Voluntary Assumption of the Risk — Assumption of risk is the plaintiff’s express or implied consent to encounter a known danger, and is a defense to strict liability in tort IF: (1) plaintiff actually knew and appreciated the risk or danger the defect created; (2) plaintiff voluntarily encountered the risk; and (3) the plaintiff’s decision to encounter the known risk was unreasonable. Misuse or Abuse of the Product — Misuse or abuse includes actions that the injured party does not know to be dangerous, whereas in assumption of risk, the danger is known. The courts have significantly limited this defense by requiring that the misuse or abuse not be foreseeable by the seller. If a use is foreseeable, then the seller must take measures to guard against it. 24-4d Subsequent Alteration Section 402A provides that liability only exists if the product reaches “the user or consumer without substantial change in the condition in which it is sold.” 24-4e Statute of Repose Is a type of statute of limitation from date of manufacturing and sale of the product in which a strict liability cause of action must be commenced. These enactments limit the period—typically to between six and twelve years—for which a manufacturer is liable for injury caused by a defective product. 24-4f Limitations on Damages Many states have limited the punitive damages that a plaintiff can collect in a product liability lawsuit by: • Placing caps on the amount of damages that can be awarded -- ranging from $50,000 to $20,000,000; • Providing for the State to receive 35percent to 100 percent of any punitive damages awarded in order to reduce the plaintiff’s incentive to bring products liability suits; • Providing for bifurcated trials; i.e. separate hearings to determine liability and punitive damages; • Increasing the plaintiff’s burden of proof for recovery of punitive damages with most states adopting the “clear and convincing” evidence standard; • Requiring proportionality between compensatory and punitive damages by specifying an acceptable ratio between the two types of damages. 24-5 RESTATEMENT (THIRD) OF TORTS: PRODUCTS LIABILITY The Restatement (Third) of Torts: Products Liability makes some significant changes in product liability. The adoption of the new Restatement by the States has been a slow process and the great majority of States continue to follow Section 402A of the Second Restatement of Torts. The Restatement Third does not use the term strict liability but instead defines separate liability standards for each type of defect. Its major provision (Section 2) defines a product as defective “when, at the time of sale or distribution, it contains a manufacturing defect, is defective in design, or is defective because of inadequate instructions or warnings." Strict liability is imposed only for a manufacturing defect, while liability for inadequate design or warning is imposed only for foreseeable risks of harm that could have been avoided by the use of an alternative reasonable design, warning, or instruction. 24-5a Manufacturing Defect A seller is strictly liable when a manufacturing defect causes the product to depart from its intended design. 24-5b Design Defect A product is defective when the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative design. 24-5c Failure to Warn A product is defective when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings. *** Chapter Outcome *** Compare strict liability in tort with the implied warranty of merchantability. Warranty Of Merchantability* Strict Liability In Tort (§402A) Condition of goods Not fit for ordinary purposes Defective condition, unreasonably dangerous Type of transaction Sales and leases (except finance leases); some courts apply to bailments of goods Sales, leases, and bailments of goods Disclaimer Must mention “merchantability” If in writing, must be conspicuous (lease must be in writing) Must not be unconscionable Sales subject to Magnuson-Moss/leases may be subject Not possible in consumer transactions; may be permitted in commercial transactions Notice to seller Required within reasonable time None required Causation Required Required Who may sue In some States, buyer and the buyer's family or guests in home; in other States, any person who may be expected to use, consume, or be affected by goods Any user or consumer of product; also, in most States, any bystander Compensable harms Personal injury, property damage, economic loss Personal injury, property damage Who may be sued Seller or lessor who is a merchant with respect to the goods sold Seller who is a merchant with respect to the goods sold *The warranty of fitness for a particular purpose differs from the warranty of merchantability in these respects: (1) the condition that triggers liability is the failure of the goods to perform according to the particular purpose of the warranty and (2) a disclaimer need not mention “fitness for a particular purpose but must be in writing.” Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637

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