Products Liability and Inefficacy Revisited

(The Inefficacy Pitfall)

by Stefan Terblanche

21 October 2013

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LEGAL LIABILITY

Causes of Action:

1.  Contract: - A voluntary agreement between the parties to enter into legal obligations.

2.  Delict (Tort): - The wrongful infringement of another’s interest and for which the wronged party can claim damages.

LEGAL LIABILITY

Contract as a Cause of Action:

3) Remedies for Breach of Contract

•  Cancellation;

•  Cancellation and Restitution; actio redhibitoria

•  Damages (positive interesse) If the parties did not specifically agree as to the quantification of damages then

the innocent party must be placed in the position he would have been in, had the contract been property performed (financially)

Actio quanti minoris

•  Specific performance.

PRODUCTS LIABILITY

Contractual Third Party Claim

• Strictly liable for latent defects; • Breach of an express/implied warranty that product is fit for intended purpose.

Latent Defect – an abnormal quality or attribute which destroys or substantially impairs the utility or effectiveness of the thing sold for the purpose for which it was sold or for which it is commonly used.

(Holmdene Brickwords vs Roberts Construction 1977)

Voetstoets Clauses – buy item as is with all defects … but no protection against fraudulent sale. (Consumer Protection Act)

Purchaser must prove:-

1. Seller aware at time of sale; 2. Maliciously concealed, with intent to defraud.

PRODUCTS LIABILITY

Liability avoided by Disclaimer

Such liability can only be avoided in the contract of sale. In Kroonstad Westelike Boere Ko-op vs Botha 1964 (A) the court held:

Liability for consequential damage caused by latent defect attaches to a merchant seller, who was unaware of the defect, where he publicly professes to have attributes of skill and expert knowledge in relation t the kind of goods sold … where a seller falls within the category mentioned will be a question of fact and degree, to be decided from all the circumstances … once it is established that it does fall within the category, the law irrebutably attaches to him the liability in question, save only where he has expressly or by implication contracted out of it.

(Pothier’s Rule)

Also extends liability to seller … as opposed to manufacturer.

LEGAL LIABILITY

Delict as a Cause of Action:

Claimant has onus to prove on a balance of probabilities all elements were present, (actio legis aquiliae, actio iniuriarum):

1. An act/omission; 2. Wrongfulness; 3. Fault (in form of intent or negligence); 4. Patrimonial Damage/Personal Injury; 5. Causality.

Also “no fault”- actions;

Actio de pastu; Actio de pauperie; Actio de effusis vel deiectis; Actio positi vel suspensi.

COVER PROVIDED

Depending on the Policy wording, the following types of liability cover are common:

1.  Public Liability; 2.  Products Liability; 3.  Defective Workmanship; 4.  Product Guarantee; 5.  Product Recall; 6.  Inefficacy/Financial Loss; 7.  Professional Indemnity; 8.  Employers; 9.  Directors and Officers; 10.  Environmental.

(Not exhaustive, examples only).

PUBLIC LIABILITY

Operative Clause

Damages which the Insured shall become legally liable to pay consequent upon accidental death of or bodily injury to or illness of any person, or accidental loss of or physical damage to tangible property

Definitions

Damage: means physical damage to, loss of or destruction or damage or loss of use of tangible property, including conversion, trespass, nuisance or wrongful interference with the enjoyment of rights over property.

Personal Injury: includes bodily injury, false arrest, invasion of the right of privacy, detention, false imprisonment, false eviction, discrimination, libel, slander or defamation of character, malicious prosecution, discrimination or wrongful dismissal.

Bodily Injury: death, injury, disability, sickness or disease or death sustained by a person resulting from such injury, disability, sickness or disease and shall include mental injury, mental anguish, shock, fright, humiliation or loss of amenities.

PUBLIC LIABILITY

Exclusions/Exceptions

•  Injury employee; •  Property belonging to; care, custody and control; •  Part working on/ have been working on; •  Advice/treatment of professional nature; •  Vehicles (mechanically propelled) … unless,

―  Beyond limits, loading, ―  Tool of trade;

•  Aircraft/Watercraft; •  Goods/Products; •  After hand over of work, defect/error etc. in work; •  Agreement; •  Fines, Penalties, etc. •  General … Pollution, War, HIV, Radiation, etc.

Normal train rail

Rail wagon wheel

Rail wagon wheel

Sideways & upwards movement of wheel over worn section

Worn train rail

EXTENSION – Custody and Control

Operative Clause …

Notwhitstanding Exclusion XX, the Insurers will indemnify the Insured against liability for and/or arising out of Damage to property temporarily in the Insured’s possession for storage or any other purpose …

Custody and Control - Example

Fruit picked/harvested at temperature ±17Cº Bulk bins, bulk cooled, this at temperature of -0.5Cº Then packed, boxed, this at temperature of ±9 - 12Cº Then either again cool storage (up to 3 months) or shipped at temperature of -0.5Cº

Treatment - anti-oxidant "Diphenylamine" ("DPA") has been used for reducing scald/cold-burn ("brand-vlek")

Commission Agent for the farmer on a "free on board" basis.

No written contract – residual rules of Contract apply

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Rule of Thumb

Products Liability

Product defective Product (itself) causes damage to tangible property

Product not defective as such, incorrect recommendation = Professional Indemnity

Products Inefficacy

Product defective; or Product unfit for intended cause; or Product does not give anticipated result.

No damage to property – Pure Financial Loss Damage to Property, but not caused by the Product

PRODUCTS LIABILITY

MultiMark

Operative Clause - … notwithstanding specific exception 3(d) … will indemnify in respect of the defined events … caused by goods or products, (including containers and labels), sold or supplied, (including wrong delivery or delivery of incorrect goods), …

Definitions

Product: any good or product (after it has ceased to be in the possession or under the control of the Insured) designed, specified, formulated, manufactured, constructed, repaired, serviced, treated, sold, supplied or distributed by the Insured, including any container thereof of instructions provided therewith.

PRODUCTS LIABILITY

MultiMark

Exceptions

•  Repair, alteration, recall, replacement; •  Demolition, breaking out, dismantling, delivery etc •  Defective/faulty design, formula, plan or specification … except if a retailer… (Pothier’s Rule, Kroonstad

Westelike Boere Ko-op v Botha, CPA) •  Inefficacy, failure to conform to specification … unless negligence in following specification; •  Aircraft; •  USA.

FINANCIAL LOSS

Operative Clause … Insured is indemnified for damages and claimants costs and expenses arising as a result of any financial loss which is incurred by customers or Third Parties as a result of any Product which fails to fulfill its intended function or to perform as specified, warranted or guaranteed.

INEFFICACY CLAIMS

Operative Clause … (Usually per Policy Definition and Extension)

Inefficacy Claims mean claims made against the Insured for economic or financial loss sustained by reason of the claimant alleging that his property:-

•  Is rendered of less value; or •  Has not achieved it’s anticipated value; or •  Has not been capable of full beneficial use

Due to the failure of any Product or part thereof to fulfill it’s intended function or to perform as specified, warrented or guaranteed

PRODUCTS RECALL

Operative Clause … in respect of expenses incurred by the Assured for the recall of products (or part) … necessary to recall … because their use or consumption (or continued use/consumption) may cause the Assured to incur legal liability (Property damage or Bodily Injury … injury, sickness, disease) as defined.

Expenditure includes:-

•  Cost to return to Assured, manufacturing Agent; •  Advertising/Announcements; •  Examination/Inspection; •  Sometimes replacement/re-working.

Exclusions:

•  Not delivered; •  In care, custody of Insured.

Presented Claim

Item Description Amount(R)

1 Products Recalled 97,858.90 2 Damaged stock 106,120.80 3 Labour 180,000.00 4 Re-packaging costs 15,739.40 5 Inspection capping machine 2,231.00 6   Total presented claim 401,950.10

Substantiation submitted:

Debit Note rejected stock; Invoice defective stock (at Production Plant); Labour – manual inspection and re-sort.