Proposed Product Liability Law Analysed

The people involved in these activities rightly expect that the equipment they use is of the highest standard for that particular activity. But they also recognise that this standard cannot be absolute, because it is in the nature of machines from time to time to fail. What is the point in having a hang glider which is so strong that you can’t lift it? Or a yacht so heavy that speed and agility is sacrificed. Should all campervans with little protection for front passengers be banned in favour of the safer front engine vehicles? All of these things are compromises.

The users of this equipment also expect that if their equipment fails in circumstances where it should not have and they are injured, they should be entitled to compensation. In other words, if there are defects in the equipment so that it does not comply with the standard that is accepted amongst its users, there should be an entitlement to compensation.

That, up until now, has been the policy of the law also. The Sale of Goods Acts provided that any goods bought should be of ‘merchantable quality’ or ‘fit for the· purpose’. The Trade Practices Act used similar terms in providing for compulsory warranties for goods. If the goods did not come up to that standard and an injury resulted, there was a right to compensation. But central to that policy of the law was that the person claiming damages for death or injury should prove that there was a defect in the equipment at the time of the sale and it was the defect which caused the accident. That was only fair. There might sometimes be difficulties of proving a defect, but if the manufacturer was made an insurer for every accident involving his equipment, then the price would be so high that only the very rich could afford to get involved. I am speaking of not only ‘risk’ sports, but even driving a motor car.

The Law Reform Commission has recently put forward a number of proposals for the reform of product liability. Tt;iere are a number of anomalies in the law relating to product liability eg: if I buy a car and it is defective and causes an accident, I can sue under the Sale of Goods Act or the Trade Practices Act. On the other hand, if I lend it to a friend and he gets injured, he can only sue in negligence, which may be more difficult to prove. The Law Reform Commission rightly proposed to get rid of such an anomaly. But while changing the wording of the standards to be applied from ‘merchantable quality’ and ‘fit for the purpose’ to not being ‘unsafe’ or ‘unacceptable’, the basic philosophy of the claimant having to prove a defect causing injury remained.

However, after receiving submissions from various sections of the manufacturing industry, the Commission issued Discussion Paper No. 37, which from a manufacturer’s (and ultimately users) point of view is far more disastrous than the original proposals. Instead of prescribing some specific standard for goods which a claimant would have to prove was breached by the manufacturer, the Commission has surprisingly completely reversed the onus of proof.

It appears that the latest proposals, rather than overcoming the industry’s fears of extended liability, will ensure that manufacturers will become insurers in many situations where their goods are involved in an accident – even where it can be established that the goods are manufactured to the accepted standard. These proposals completely reverse the onus of proof. Worse than that, they provide for a liability even if it can be positively established that there was nothing wrong with the goods whatsoever.

The draft amendments to the Trade Practices Act provide for the following:

S. 75AA provides that a person “who suffers loss or damage caused by the way goods acted (whether or not there were other causes) has a right to compensation in the amount determined as follows:”

• Calculate the total amount of the loss or damage;

• then subtract the proportion of that amount that corresponds to the extent to which the following caused the loss or damage: – the way other goods acted; – the claimant’s conduct and the conduct of other persons that did not involve the goods.

• then subtract the proportion of the resulting amount that corresponds to the extent to which the following caused the goods to act in the way they did: – the unreasonable conduct of the claimant; – the unreasonable conduct of a person (except a person involved in the manufacture or supply of the goods) that occurred after the goods left the control of the enterprise.

The first thing to be said about this piece of legislative drafting is that an ‘act’ is something which one associates with a person, not with a machine. Machines might ‘behave’ in a certain way, but they don’t ‘act’. The Commission overcomes this distortion of language by including ‘behave’ in the definition of ‘act’. However the problem is too important to be worried about pedantics. How is this going to work out in practice?

Let’s take the case of a light aircraft carrying 3 passengers, which is hit by unexpected clear air turbulence, breaks up and crashes.

• Under S. 75AA everyone is entitled to compensation because they were injured “by the way the goods acted” – the plane crashed.

• You determine the total amount of compensation – say $4m.

• You subtract from that “the way other goods acted” – not relevant, (S. 75AA(l)(b)(i)): Nil.

• You subtract from that “the claimant’s conduct and the conduct of other persons that did not involve the goods” – not relevant. (S. 75AA(1)(b)(ii)): Nil. The above example assumes that there was no pilot error.

• You then subtract S. 75AA(1)(c): Nil, because going up in a light plane is not ‘unreasonable conduct’. Nor is there any unreasonable conduct on the part of the pilot – the turbulence being something that the pilot could not have expected.

The end result is that the manufacturer of the plane becomes in effect an insurer in circumstances where you cannot establish that the accident occurred through pilot error. In the case where pilot error is the sole cause of the accident, there would be no claim, because you take away that proportion that corresponds to the extent to which his unreasonable conduct contributed to the accident. But where the accident is caused by some unexplained event or a quirk of the weather, there is a claim against the manufacturer. The injured party doesn’t have to prove that there was anything wrong with the plane. And even if the manufacturer proves that there was nothing wrong with it, he still pays. The same principle will apply to manufacturers of yachts destroyed by storms.

A defence is contained in S. 75AC: “A person who knew enough facts about the goods as to enable a reasonable person to appreciate the extent of the risk that the goods would act in the way that they did has no right to compensation under this Part”.

• At par. 20, the Commission says that this is subjective.

• The normal rules of procedure are that if a Statute provides a defence, the onus of proving that defence is on the defendant. That means that the manufacturer of the plane would have to prove that the pilot and passengers were aware of the risk of a plane cracking up in clear air turbulence. How can he do that if they don’t remember anything about the accident? Or worse still, if they are dead. Presumably, the Commission says that this can be overcome by adequate warnings.

• But what about children? No warning is ever going to make them subjectively aware of the risks. The end result is that the manufacturer is going to be the insurer for all children carried in planes.

• This could result in enormous payouts by manufacturers in the case of a child who survives a plane crash and is seriously injured. And the crash might have had nothing to do with any defect in the plane.

• The end result is that even though a manufacturer might want to stop children going up in his planes, there is no way that he can prevent it and he will still be liable.

• Manufacturers of cars and boats have exactly the same problem.

Even in relation to adults, how can a manufacturer ensure that the warning is given by the pilot or owner of the plane, boat or car to his passengers? He can’t. He might paint the warnings all over their interiors, but there is no guarantee that they are going to stay there – after all he has no control over what happens to the goods after it leaves his factory. If there are no warnings, then there is no defence and the manufacturer pays.

What I have said here applies equally to cars, yachts and boats. A car runs off the road and into a tree. The driver and passengers do not remember what happened. The manufacturer would have to prove that it was the driver’s fault, or the car service people or specifically someone else’s fault, or that the yacht hit a whale if he wants to escape liability.

Under the present law, a claimant has to prove that the goods that he purchased were not of ‘merchantable quality’ or ‘not fit for the purpose’, where that purpose is made known to the seller. If the manufacturer or seller can establish that the goods were made to something like the Australian Standards, or some government regulation, he goes a long way to establishing that the goods are of merchantable quality. But in any event, the onus is on the claimant to prove that those goods breached that condition at the time of sale.

What the Commission has done is to give the claimant an automatic right to compensation where injuries result from the way goods ‘acted’, subject to certain defences. S. 75AD provides that there is no right to compensation where the goods complied with a mandatory standard and the goods acted in the way they did only because of such compliance. The Commission has not really provided a defence based on mandatory standards at all. Let’s take hang gliders for example. The standard accepted in Australia by both manufacturers and users of hang gliders is that it should be able to withstand 6g forces positively. If a glider breaks up in severe turbulence, S. 75AD does not provide a defence by simply establishing that the glider was certified to 6gs. The glider did not break up “only because of such compliance”. It broke up despite such compliance. At least under the previous proposals, a manufacturer could argue that the goods were safe and acceptable because that was the degree of safety the hang gliding community had agreed to accept. Now, he cannot even argue that. The same problem applies to light aircraft, cars, yachts, boats or anything which is from time to time at the mercy of nature.

I don’t understand the reluctance of the Commission to allow a defence based on compliance with a standard. What usually happens in any regulated industry is that if the standard is not high enough, the Government lifts it. But manufacturers have to know where they stand. This ‘defence’ only creates enormous uncertainty as to the proper standard to which goods should be built.

Under the latest proposals, where you have any aircraft accident in which the manufacturer is unable to prove: (i) pilot error, or (ii) that compliance with the standard caused the accident, the manufacturer will be liable. So, in practice, all weather related accidents will be the responsibility of the manufacturer. Again, the same applies to boats and cars.

S. 75AK in relation to Compensation to Relatives is even more disturbing. S. 75AK(2) provides “A dependent of a person whose death was caused by the way goods acted (whether or not there were other causes) has a right to compensation under this Part for loss or damage that arose out of the death. ”

It has always been accepted that Compensation to Relatives Actions are independent of the rights of action of the person who died. This distinction is preserved in S. 75AL which provides that the rights under the Act survive for the benefit of the dead person’s estate. A claim by the estate under S. 75AL has the same characteristics as a claim by the person himself, ie, there would be deductions for the “way other goods acted and the claimant’s conduct and conduct of other persons” under S. 75AA(1)(a), (b) and (c). However, under S. 75AK(2), no attempt has been made to apply these deductions where the dependents make a claim. Let us assume in our example above, that the pilot and his three passengers died. All their dependents would be entitled to compensation because the occupants of the plane died as a result of the plane breaking up and crashing, (“death caused by the way the goods acted”).

But the section goes further than that. Unlike the previous sections, no deduction is to be made for the “unreasonable conduct of a person . . . that occurred after the goods left the control of the enterprise”. If the pilot flew into a thundercloud and this was the total cause of the plane breaking up, all the occupants would fail in their claims against the manufacturer if they survived because there would be a deduction under S. 75AA(1)(c), being “unreasonable conduct of a person that occurred after the goods left the control of the enterprise”. They might have a claim against the pilot, in negligence, but not against the manufacturer. But if they all died (which is the most usual result in aircraft accidents), then pilot error is excluded There is no deduction.

The end result is that in the case of fatal accidents, the manufacturer will become the insurer, even though there was nothing wrong with his aircraft and even though the actual cause of the deaths was pilot error. Again the same principle applies to the man who takes some friends out in a yacht. They hit a storm and all die. Their dependents sue the manufacturer. They must win. The ‘warning’ defence in S. 75AC is not going to help the manufacturer because the dependents were not the ones warned of the risk.

There is also a further anomaly. S. 75AB(1) provides that a claimant must on commencing proceedings file and serve an affidavit giving particulars of the circumstances in which the loss or damage occurred so far as they are known to the claimant. Under the Compensations to Relatives section, the dependents or personal representatives are the claimants. They are obviously going to file affidavits saying that they know nothing about the accident and probably nothing about the use or misuse of the goods in question. But they have complied with the section. According to paragraph 17 of the Discussion Paper, the purpose of this section was to allow the defendant to cross examine people injured by goods as to their uses of them. That is fine for the person burning their finger on a toaster, but just will not work in the case of fatal accidents.

Even if the Commission cleaned up S. 75AK to ensure that the same deductions apply to fatal accidents, there are still enormous problems for a manufacturer. For example, there is no time limit on the manufacturer’s liability. S. 75AJ provides for a limitation period of 3 years after the claimant became or ought reasonably to have become aware of the loss or damage. In other words, there is a limitation of 3 years after the accident happened, not after the goods left the factory. Cars, boats, planes, hang gliders, parachutes, canoes can be sold and resold many times. The manufacturer has no control over what has happened to the goods ten years down the track.

What this proposed Bill does is to put the onus on him to prove that the reason the goods failed was because of some unreasonable conduct on the part of the claimant or some other person. The Commission thinks that this problem is overcome by making the claimant file an affidavit as to his use of the goods. That is fine where there is one owner. What is the situation where a car has six owners? The seventh buys it and a week later the brakes fail, in order to escape liability, the manufacturer would have to establish that ten years down the track, the failure of the brakes occurred because of someone else’s unreasonable conduct. The claimant files an affidavit in which he says that he bought the car and a week later, the brakes failed. If the manufacturer cannot establish that there has been unreasonable conduct by one of the previous owners, he automatically pays. The brakes might have failed because of wear and tear. It doesn’t matter. He pays.

The final blow to manufacturing industry in Australia is S. 75AG. That provides that if a corporation is liable and does not pay the judgment within a reasonable time, then its holding company and each related body corporate become jointly and severally liable to pay the amount unpaid. No problem with that. But then S. 75AG(2) provides that if there is no holding company or related body corporate, or the judgment is not satisfied within a reasonable time, the directors of the corporation become jointly and severally liable to pay the amount paid.

The section does not say which directors: the directors at the time of the manufacture of the goods, or the directors at the time of judgment, which could be ten years down the track. One can only assume they mean the directors at the time of the judgment. If ever there has been a disincentive for people to become directors of manufacturing companies, this must be it. In becoming a director of a manufacturing company, one is assuming a potentially disastrous liability for something which happened many years before and of which one had absolutely no knowledge or control.

Finally, the Law Reform Commission has done the members of the legal profession an enormous favour. While most governments have been trying to restrict the role of lawyers in areas such as Workers Compensation and road accidents, the Commission has ,opened for us a new gold mine. If the Bill becomes law, every time there is a fatal car accident my clients will be suing Nissan, Ford, Mitsubishi and others. It won’t matter if the driver was drunk when he hit the tree, because unless there is a deduction for the unreasonable conduct of the driver, in the case of a fatal accident, the manufacturer will also be paying for the dependents.

And let’s look at the realities of litigation. If an injured person has no chance of proving a case against a manufacturer because he cannot establish that the product was faulty at the time it left the factory, he won’t start a claim. Nor will he be given legal aid. But if the law puts the onus of proof on the manufacturer to prove that other people caused the problem, the claimant is in a strong bargaining position to force a settlement in circumstances where there was absolutely nothing wrong with the goods at the time they left the factory, but the manufacturer cannot prove it. If an injured person does not have the onus of proving a case of defective goods, then there is every chance that he will get Legal Aid. Again, the taxpayer foots the bill!

And what of our ‘risk’ sports. Since the Commission is proposing that unless warnings are given to each user (not just the purchaser), it is fairly clear that unless the manufacturer can positively establish that warnings were given, or that the claimant’s use of the goods were unreasonable, then he will be liable. The hang glider manufacturer will become liable for someone buying a second-hand glider out of the newspaper where no warning is given and he cannot establish that the pilot was flying in unreasonable conditions. A boat manufacturer will be liable to the families of persons drowned when hit by a sudden and unexpected squall. It doesn’t matter that the boat was 10 years old and had four previous owners and was still in good condition.

No businessmen in their right minds would be prepared to take those sorts of risks by getting involved in the manufacture of ‘risk’ sporting equipment. Oh well, looks like we will all have to play bowls.