Commercial Law to Manufacturer Liability - Coursework Example

COMMERCIAL LAW MANUFACTURER LIABILITY CONTENTS What are the relevant laws relating to manufacturer’s liability? 2 1. Common Law Liability 2 1.2. Statutory Liability: Trade Practices Act 1974 3 2. How do these provisions protect consumers? 7 2.1. Aim of the TPA and Enhanced Consumer Protection 7 2.2. Section 52 TPA: Misleading Conduct 8 3. The difficulties faced by manufacturers in light of these legal provisions 9 BIBLIOGRAPHY 10 Memo To: From: CC: Date: 26/08/2016 Re: Commercial Law – Manufacturer’s Liability This memorandum provides a detailed report on the laws relating to manufacturers liability and consumer protection. 1. What are the relevant laws relating to manufacturer’s liability? 1.1. Common Law Liability Manufacturer liability in Australia is covered by common law and statute. Under the common law, manufacturer liability is covered by tort and contract law principles. Under contract, ultimately the terms of contract will liability on grounds of freedom of contract principles. Manufacturer liability in tort is primarily governed by negligence and the tort of misrepresentation. For manufacturer liability to arise, both torts require the claimant to establish a duty of care, which can be problematic for a claimant particularly in misstatement cases. The test for whether or not there is a legal duty of care was established in the case of Donoghue v Stevenson1. Lord Atkin asserted that a manufacturer owed a legal duty of care to the ultimate consumer of his product. In discussing duty of care as a legal concept, Lord Atkin established the “neighbour” principle. Furthermore, in the case of in the Bolton v Stone2 the House of Lords held that whilst foreseeability was relevant to the issue of whether as duty of care exists, once established the issue of breach was ultimately dependant on the reasonableness of the defendant’s actions. In order for a manufacturer to be liable in negligence there has to be proximity and the case of Anns v Merton London Borough3 asserted that the proximity test relies on a consideration of the nature of the relationship between the parties. Once duty of care has been established, a claimant has to establish that the manufacturer’s breach of duty caused actionable damage. The standard of care imposed by law in order to determine a breach of duty is objective and that of “the reasonable and prudent man4”. The degree of care to be expected is founded on considering what a reasonable man, careful for the safety of his neighbour would do and requires a consideration of the degree of the likelihood of harm occurring, the cost and practicability of measures needed to avoid it and the seriousness of the consequences5. The preliminary test for determining causation is the “but-for” test and whether the claimant would not have suffered the damage “but-for” B’s negligence6. Moreover, the Wagon Mound No.17 decision asserted that a defendant is only liable to pay damages if the damage was reasonably foreseeable and not too remote. 1.2. Statutory Liability: Trade Practices Act 1974 The primary legislative measures pertaining to manufacturer liability are governed by the Trade Practices Act 1974 as amended (TPA), which implies certain rights and warranties into commercial contracts and consumer sales agreements. The TPA applies to “manufacturers” and the statutory definition of manufacturers is extremely wide, covering licensors and importers. Section 74A of the TPA provides that a company will be considered a manufacturer for the purposes of the product liability if: a) it holds itself out or allows its resellers to hold it out as the manufacturer of those goods; b) it trade marks those goods and applies that mark to the goods itself or its packaging; or c) it imports those goods, provided that the true manufacturer does not have a place of business in this country. Accordingly, an importer with no place of business will still be caught by the provisions of the TPA, although there will clearly be jurisdictional issues. The basis of manufacturer liability exposes a company to liability for goods supplied on various grounds. Firstly, a manufacturer may be liable under tort or contractually to a distributor or consumer. Secondly, a manufacturer may be liable to pay compensation for misleading or deceptive conduct on grounds of representations made (expressly or by implication) to the distributor and/or consumer on grounds that the product are of a certain standard or fit for certain purposes as set out under sections 52 and 53 of the TPA. Both actions are independent as evidenced by the decision in Ghariban v Propix Limited, trading as Jamberoo Recreational Park8 where the applicant was unable to succeed under section 52 of the TPA, however won its case on appeal for breach of implied warranty in contract. Furthermore, section 74H of the TPA provides for a statutory indemnity in favour of the distributor, covering the distributor’s liability under any warranties it owes to its customers implied under the TPA section 74J. Additionally, there is also the statutory right of consumers to seek compensation directly from the manufacturer for sub-standard goods. Under the TPA, a statutory indemnity is imposed on manufacturers in respect of distributor liability to consumers. Under the TPA a distributor will be liable to its customer for breach of the implied warranties of the TPA if it supplies a defective product. The TPA implies the following warranties: 1) the goods shall be of merchantable quality; 2) the goods shall be fit for purpose; 3) the goods shall match the sample against which they are sold; and 4) the goods shall match the description against which they are sold. Moreover, these warranties are implied directly into the distributor/consumer consumer contract where the distributor supplies goods to the customer which are worth $40,000 or less. If the goods are worth in excess of $40,000 the implied warranty provisions will be applicable if the goods are of a kind ordinarily acquired for personal, domestic or household use or consumption. Inherently domestic goods are goods that are usually found at home. The courts have adopted a wide interpretation of “inherently domestic”. For example, in the case of Carpet Call Pty Limited v Chan9 it was determined that carpets whilst sold in commercial quantities are still “inherently domestic” for the purpose of the TPA provisions. Additionally, in the case of Bunnings Group Limited v Laminex Group Limited10 it was held that versions of products that target the commercial market but are used exclusively in commercial applications may still be inherently domestic for the purpose of manufacturer liability. If the goods fail to satisfy the implied warranties, the distributor will be liable to the customer. From the manufacturer’s perspective, the liability arises as an indemnity for the distributor’s liability pursuant to a statutory indemnity set out in section 74H of the TPA. However, the manufacturer’s liability is restricted to breaches of the implied warranties and not to the distributor’s liability in contract or tort. Accordingly, if the claimant brings a claim against the distributor solely for breach of contract without claiming for the implied statutory warranties covered by the TPA the manufacturer will not be liable for the debt. As regards a manufacturer’s direct liability to customers, this will only arise in respect of goods that are “inherently domestic”. These statutory rights will apply even if the goods have passed various intermediaries before reaching the consumer. Under section 74 of the TPA, the manufacturer will be directly liable to the end user, if they can establish the following: 1) the goods are not of merchantable quality (Section 74D) 2) the goods do not match the description of the goods, where the description was applied to the goods by the manufacturer or with the consent of the manufacturer (Section 74C); or 3) the goods do not correspond with a sample in terms of quality or by reason of a defect provided that the sample was supplied by the manufacturer or with the manufacturer’s consent and the bulk of goods supplied fail to match the sample (Section 74E). Moreover, manufacturers including overseas manufacturers are further exposed to consumer claims for defective goods under Part VA of the TPA, which defines “defective goods” as a good that is not as safe as one would reasonably expect in the circumstances. Manufacturers cannot exclude or limit liability under these provisions As a result of the $40,000 provision in the TPA, the implied warranties provisions apply on the sale of inherently commercial products if the value of the contract is $40,000 or less, which therefore exposes distributors to liability for breach of implied warranties. The distributor is therefore able to limit its liability however has to do so in the terms and conditions of supply. The TPA sets out the permissible exclusions and limitations of distributor liability thus: 1) supplying the goods again 2) providing equivalent goods; or 3) repairing the goods. With regard to manufacturer liability, the TPA automatically limits exposure in actions by the distributor claiming compensation under the statutory indemnity to the same extent as distributor. Moreover, a manufacturer will not be liable to direct consumer action unless goods are “inherently domestic” as section 74A (2) (a) of the TPA deems all references to “goods” in Division 2A (which deals with direct rights) to be goods that are inherently domestic. Therefore any direct rights against manufacturers are restricted to inherently domestic goods. However, if goods are inherently domestic, even if valued over $40,000 the distributor’s liability is uncapped and any attempt to limit is void and as such, the manufacturer is thereby exposed by the obligation to compensate the distributor to the full extent of liability. Moreover, manufacturers can face direct consumer action with uncapped liability. With regard to inherently commercial products, distributors can limit liability however failure to do so will result in potentially uncapped liability however manufacturers will only be liable subject to the statutory cap. 2. How do these provisions protect consumers? 2.1. Aim of the TPA and Enhanced Consumer Protection The central aim of the TPA is to ensure that consumers who inherently have an unequal bargaining position are protected from defective products, have the right not to be misled and are protected from unlawful selling practices. This is further achieved by the introduction and absolute enforcement of implied warranties in consumer contracts. The TPA in particular operates against predatory pricing and the Australian Competition and Consumer Commission highlights a central element of the provisions being to prevent consumer exploitation through predatory pricing and the implementation of unreasonable contractual terms and conduct between parties11. 2.2. Section 52 TPA: Misleading Conduct For example, section 52 of the TPA prohibits misleading conduct in trade or commerce and provides an alternative basis to liability in tort law for misrepresentation and misstatement, which has been a difficult area for claimants as evidenced by decisions such as Esanda Finance Corporation Limited v PEAT Marwick Hungerfords12. Section 52 of the TPA provides that “a corporation shall not, in trade, or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”. This is very wide and extends to all forms of misleading conduct and is not restricted to misrepresentation at common law. Indeed, “Section 52 is seen as being so important to consumers it has been replicated in other Federal and State legislation”13. Section 52 provides for a general standard of conduct to determine commercial behaviour by covering corporations, in trade or commerce and conduct which is misleading or likely to mislead. It is the most litigated section of the TPA where it is “now a factor to be considered in most fields of commercial activity14”. Chew further argues that whilst section 52 provisions are analogous to tort, “the diversity of actions brought under the section reflects that it is expressed in general terms and is designed to have a broad reach”15. However, from a manufacturer’s perspective courts as emphasised in the case of Rhone-Poulenc v UIM Chemical Services16 that “Section 52 should be interpreted according to the natural ordinary meaning of the language. Whether it has been contravened depends upon the analysis of the conduct of the alleged contravener in light of all the relevant circumstances constituted by acts, omissions, statements or silence”. This is clearly swings the pendulum in favour of consumers by covering silence. Chew further argues that the decision in Gregg v Tasmanian Trustees Limited17 highlights that the TPA provisions have rendered actions for misleading conduct outside the parameters of the common law duty of disclosure. As such, Chew argues that the misrepresentation provisions “transformed the face of the law of contract itself and the assumptions which underpin it18”. It further strengthens consumer rights as claims under the TPA operate outside the common law, which can be pursued in the alternative or concurrently. Whilst the term misleading is not defined, in the case of Puxu Pty Ltd v Parkdale Custom Built Furniture Limited19 and Henjo Investments Party Limited v Collins Marrickville Pty Limited20 it has been interpreted as conduct which is inconsistent with the truth or which leads or is likely to lead the person to whom it is directed astray and into error or to cause that person to err. In the case of Tillmans Butcheries Pty Limited v Australasian Meat Industry Employee’s Union21it was held that conduct likely to deceive if there is a real or not remote chance that the conduct will have an effect, which further highlights the pro-consumer nature of the section 52 provisions. 3) The difficulties faced by manufacturers in light of these legal provisions. In summary, whilst negligence and contractual liability has been well established, the pro-consumer nature of the TPA provisions is far reaching. They further expose manufacturers to potentially onerous claims. Firstly, the TPA claims are concurrent thereby exposing manufacturers to multiple causes of action in both the common law and under statute. Additionally, the courts have taken a wide interpretation of “inherently domestic” products and “misleading conduct” thereby widening the possibility of claims against manufacturers. The wide definition of inherently domestic products exposes manufacturer’s to uncapped liability without ability to restrict liability. Additionally the Trade Practices Legislation Amendment Act 2008 came into force on 22 November 2008 with further implications for manufacturers by amending sections 10, 46, 51AC, 86 and 155 of the TPA. Of particular relevance to manufacturers, is section 46 of the Act includes a new subsection 6A, which clarifies the meaning of “take advantage” and the role of recoupment in predatory pricing under section 46(1) is clarified by inserting section 46(1AAA). This subsection provides that in proving such cases, it is not necessary to demonstrate that recoupment is possible. Moreover, Section 51AC removes the monetary threshold of $10million applicable to unconscionable conduct cases. BIBLIOGRAPHY Articles/Books The Australian Competition and Consumer Commission. Small Business and the Trade Practices Act http://www.acc.gov.au/content/item.phtml at 12 January 2009 Charles Y C Chew. The Scope and Limitations of the Doctrine of Misleading or Deceptive Conduct in the context of Guarantees: Some Perspective and Uncertainties (2006) MqJBL Volume 3. Case Law Anns v Merton London Borough [1978] A.C. 728. Bolton v Stone [1951 AC 850 (HL). Bunnings Group Limited v Laminex Group Limited [2006] FCA 682. Carpet Call Pty Limited v Chan (1978) ATPR Digest 46-025 Cork v Kirby MacLean [1952] 2 ALL ER 402. Donoghue v Stevenson [1932] AC 562. Esanda Finance Corporation Limited v PEAT Marwick Hungerfords [1977] 71 ALJR 448 Henjo Investments Party Limited v Collins Marrickville Pty Limited (1988) 79 ALR Ghariban v Propix Limited, trading as Jamberoo Recreational Park [2007] NSWCA 151 Overseas Tankship (UK) Ltd v The Miller Steamship Co Limited (The Wagon Mound No. 2) [1961] Ac 388. . Overseas Tankship (UK) Limited v Morts Dock & Engineering Co Limited (The Wagon Mound No. 1) [1961] AC 388 Puxu Pty Ltd v Parkdale Custom Built Furniture Limited (1982) 149 CLR Rhone-Poulenc v UIM Chemical Services Tillmans Butcheries Pty Limited v Australasian Meat Industry Employee’s Union (1979) 42 FLR 331. Legislation Trade Practices Act 1974 Trade Practices Legislation Amendment Act 2008 Read More