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PRODUCT LIABILITY AND CONTRACT LAW: THE QUESTION OF EXCLUSION CLAUSES

Authored by Niharika Mukherjee, a 2nd year law student at National Law School of India University (NLSIU), Bengaluru.



INTRODUCTION

The tension between contracts and statutory torts, such as the product liability provisions in various consumer protection regimes around the world, is long-standing. An area of particular interest, and a possible measure of the robustness or consumer-friendliness/business-friendliness of a particular contract law regime is how it negotiates this tension. One theatre where the conflict plays out is the realm of exclusion clauses, clauses that seek to limit liability or exclude a party from liability in a contractual relationship.


In this light, this article will undertake a brief analysis of how exclusion clauses are treated in product liability regimes internationally, and in India, using the Contract Act, 1872, the Sale of Goods Act, 1930, and the Consumer Protection Act, 2019, in addition to judgements, for the latter purpose.


PRODUCT LIABILITY AND THE LAW OF CONTRACTS

Product liability may be broadly defined as the liability of a product manufacturer, or any other party in the chain of manufacture, for damage caused by a defect in their product.[i] Its present form originated in the twentieth century in American and English courts, on the basis of rationales including fairness[ii] and concern for consumer safety.[iii] Over time, the basis of this liability has shifted from contract to tort,[iv] although both may bear relevance in product liability cases.[v]


Arguments for a contractual approach to establishing product liability emphasise freedom of contract, and the significance of market forces and regulation[vi], as opposed to court-enforced liability, in ensuring product safety. On the other hand, arguments against it emphasise the potentially unequal bargaining power in business-consumer agreements.[vii]



LIMITATION OF PRODUCT LIABILITY ABROAD

Internationally, two product liability models have been accorded significance. These are the United States (US) Model and the European Union (EU) Model. This article shall examine the former in greater detail.


In the US, the evolution of product liability law can be classified into three stages. The first stage comprised contract law actions, on breach of warranty.[viii] The second stage, beginning with Greenman v Yuba Power Products,[ix] introduced strict liability in relation to product liability claims, to prevent the rights of consumers from being taken away by the “intricacies of the law of sales”.[x] This was followed by a period of codification of consumer law and saw a vast number of product liability cases being litigated.[xi] In response, the third stage, with the development of the Third Restatement of Torts,[xii] has seen attempts to make it more challenging for consumers to succeed in product liability action, for instance, with the removal of the ‘consumer expectations test’.[xiii]


A notable feature of the US law is the existence of statutory provisions which impose restrictions on contract-based limitation of product liability. For instance, the Magnuson-Moss Act [xiv] effectively abolishes ‘phantom warranties’[xv]- those by which a seller attempts to disclaim statutorily imposed implied warranties.[xvi]

Significantly, the EU Model too prohibits the limitation or exclusion of a producer’s liability arising from the Product Liability Directive, 1985.[xvii] Further, under a later directive, contractual terms that restrict the rights of a consumer arising from the directive are not binding on them.[xviii]


Finally, international law on product liability has been consolidated in the United Nations Guidelines on Consumer Protection.[xix] The 2015 amendments to these guidelines, in particular, have articulated certain ‘good business practices’, reflecting an international consensus for promoting ‘disclosure and transparency’ regarding ‘terms [and] conditions’ in business-consumer interactions.[xx]


LIMITATION OF PRODUCT LIABILITY IN INDIAN LAW

While ‘product liability’[xxi] has been defined recently in Indian law in the Consumer Protection Act (CPA), 2019, courts have dealt with cases involving defective products and services on the basis of tort law principles even before this development.[xxii] This approach prevails presently as well, as seen in, for instance, the Kerala Tourism Development Corporation v Deepti Singh[xxiii] case. Hence, Indian product liability law may presently be considered comparable to the ‘second stage’ in the US model.

At the same time, Indian courts have recognized that ordinarily, parties are bound by the terms of a contract voluntarily agreed upon by them, ‘and it is not for a Consumer Forum or even a Court to revise the said terms.’[xxiv]


However, it has also been affirmed, for instance, in Shalabh Nigam v Orris,[xxv] that contract terms may be prevented by courts from being binding in cases of ‘unfair trade practices’.[xxvi]

Specifically, Indian legislations follow the UN Guidelines’ broad approach based on ‘unfairness’ with regard to limiting product liability. Marking a departure from both the US Model and the EU Model, the CPA, 2019 does not expressly prohibit exclusion or limitation of liabilities incurring from the Act. Hence, the question of limiting liability or waiving of claims through an express contractual term remains unaddressed as yet.[xxvii] The ambiguity in this regard is furthered by Section 62 of the Sale of Goods Act, 1930, which states that ‘any right, duty or liability’ arising ‘under a contract of sale by implication of law’, ‘may be negatived or varied by express agreement’.[xxviii]


Two provisions, however, make it appear unlikely that contractual terms significantly limiting liability would be looked upon favourably by Indian courts. The first is the expansive definition of ‘unfair contract’ under the CPA, 2019, which includes those causing ‘significant changes in the rights of the consumer’, including imposing any ‘condition which puts [the consumer] to disadvantage’.[xxix] In this context, it is also significant that the CPA 2019 allows State Consumer Commissions and the National Consumer Disputes Redressal Commission (NCDRC) to ‘declare any terms of a contract, which is unfair to any consumer, to be null and void’.[xxx]


Secondly, and more generally, Section 28 of the Indian Contract Act, 1872 prohibits any agreement which would absolutely restrict a consumer from enforcing their rights (including, as it may be understood, those conferred by the CPA, 2019), ‘by the usual legal proceedings’.[xxxi]

On this basis, an exclusion from warranty as in Strand Saloon v Jaycee Automobiles,[xxxii] where the exclusion from warranty applied only when the damage to the car was due to contaminated oil, has been considered binding. However, as the recent case of Ireo Grace Limited vs Abhishek Khanna affirms, the distinction between fair and unfair contractual terms is an issue open for courts to decide on.[xxxiii] This, it is argued, can create considerable uncertainty in relation to the ‘fairness’ of limitation clauses, when seen in reference to broadly worded provisions such as the definition of ‘unfair contract’ under the CPA, 2019.[xxxiv]


It is argued that the introduction of a statutory provision defining what kinds of express contractual terms would be unacceptable in relation to product liability, similar to the prohibition of ‘phantom warranties’ by the American Magnuson-Moss Act,[xxxv] would assist in bringing clarity among contracting parties in India, and reduce the burden of contract-based litigation.


CONCLUSION

It may be concluded that in the multidisciplinary debate [xxxvi] on the efficiency of the product liability principle in ensuring product safety, India appears to have generally conformed to the ‘consumer-oriented’ as opposed to the ‘freedom of contract’ approach.[xxxvii] Whether developmental concerns and changing economic policies will create a shift in Indian law in favour of companies’ and consumers’ freedom to contract on product liability, serves as a pertinent point of future study.

[i] UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, MANUAL ON CONSUMER PROTECTION, 70 (2016).

[ii] A Polinksy and S Shavell, The Uneasy Case for Product Liability, 123(6) HARVARD LAW REVIEW 1476 (2010).

[iii] Stephen Ray Strobel, Made Safely in the USA Rethinking U.S. Strict Product Liability Laws to Counter China, 39 W St U L Rev 155, 167 (2012).

[iv] Polinsky, supra note 2, at 1439.

[v] Victor P Goldberg, A Re-examination of Glanzer v. Shepard: Surveyors on the Tort-Contract Boundary, 3 THEORETICAL INQ L 475, 476 (2002).

[vi] Polinsky, supra note 2, at 1443.

[vii] UNCTAD Manual, supra note 1, at 67.

[viii] Strobel supra note 3, at 156.

[ix] Greenman v Yuba Power Products, 59 Cal.2d 57 (1963).

[x] Strobel supra note 3, at 157. [xi] K Thomas, The Product Liability System in China: Recent Changes and Prospects, 63(3) THE INTERNATIONAL AND COMPARATIVE LAW QUARTERLY 762 (2014).

[xii] American Law Institute, Restatement of the Law Third, Torts: Products Liability (1998).

[xiii] D WARNER & G SIEDEL, BASICS OF PRODUCT LIABILITY, SALES AND CONTRACT 792 (Saylor Foundation 2012).

[xiv] Magnuson-Moss Warranty-Federal Trade Commission Improvement Act, 15 U.S.C. § 2301 et seq. (1975).

[xv] Warner, supra note 13, at 774.

[xvi] Magnuson-Moss Act, supra note 14, Section 108. [xvii] Council Directive 85/374/EEC on Product Liability [1985] Article 12.

[xviii] Council Directive 1999/44/EC on Consumer Sales and Guarantees [1999] Article 7(1).

[xix] UNGA Resolution 39/248 on United Nations Guidelines for Consumer Protection [1985].

[xx] UNGA Resolution 70/186 [2015] Section IV (11)(c).

[xxi] Consumer Protection Act, 2019, No. 35, Acts of Parliament, 2019, Section 2(34).

[xxii] B Ashiya, India’s Consumer Protection Bill 2015: Redefining Notions of Liability, 38(2) STATUTE LAW REVIEW 258.

[xxiii] The Managing Director, Kerala Tourism Development Corporation Ltd. vs. Deepti Singh, (2019) A CJ 1588 (India).

[xxiv] Satish Kumar Pandey and Anr v Unitech Ltd, (2015) SCC OnLine NCDRC 14 para 11.

[xxv] Shalabh Nigam v Orris, (2019) III CPJ165 (NC).

[xxvi] Shalabh Nigam supra note 21, at para 4.

[xxvii] Nishith Desai Associates, Frequently Asked Questions on the Consumer Protection Act, 2019 (2020) 17 para 3.

[xxviii] Sale of Goods Act, 1930, No. 3, Acts of Parliament, 1930, Section 62.

[xxix] Consumer Protection Act 2019 Section 2(46) and Section 2(46)(vi).

[xxx] Consumer Protection Act 2019 Sections 49(2) and 59(2).

[xxxi] Indian Contract Act 1872, Section 28.

[xxxii] Strands Saloon Pvt Ltd vs Jaycee Automobiles Pvt Ltd, (2018) IV CPJ 282 (NC) para 12 and 13.

[xxxiii] Ireo Grace Realtech Pvt Ltd v Abhishek Khanna, (2021) SCC OnLine SC 14 para 69.

[xxxiv] Consumer Protection Act 2019 Section 2(46).

[xxxv] Magnuson-Moss Act supra note 16, Section 108.

[xxxvi] AL Wickelgren, The Inefficiency of Contractually-Based Liability with Rational Consumers, 2(1) JOURNAL OF LAW, ECONOMICS AND ORGANIZATION 168 (2006).

[xxxvii] P Rubin, ‘Courts and the Tort-Contract Boundary in Product Liability’ in FRANK BUKLEY (ed) 9, THE FALL AND RISE IN THE FREEDOM OF CONTRACT (Duke University Press 1999).

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