Australia: Liability For Manufacturers Who Supply Unmerchantable Goods - A Novel Statutory Cause Of Action Available To Australian Plaintiffs

Introduction

Until recent times, product liability claimants in Australia typically relied upon negligence to establish a right to damages, pleading in the alternative misleading or deceptive conduct under section 52 of the Trade Practices Act 1974 (Cth) ("the TPA"), and a breach of one or more of the statutory causes of action against manufacturers and importers of defective products contained within Part V Division 2A and Part VA of the TPA.

However, restrictions on the availability of common law negligence, combined with the likely continuing limitation of personal injury claims under section 52 of the TPA, make it inevitable that the battle ground for future litigation will involve these alternative statutory causes of action contained within Part V Division 2A (sections 74B and 74D) and Part VA of the TPA.

Although there is a relative paucity of case law defining the extent of these provisions, some recent decisions of the Federal Court provide some guidance. The case law that does exist reveals that Division 2A of Part V is being interpreted in a very broad way and may impose more stringent standards on manufacturers than common law negligence.

In this article, I will give a general overview of the statutory cause of action available under section 74D in Part V Division 2A and concentrate on a recent decisions regarding that section. Section 74D makes a manufacturer or distributor liable for the consequences of selling goods which are not of merchantable quality. This is cast in terms of whether the product is reasonably fit for the purpose for which goods of that kind are normally bought.

Allegations made pursuant to section 74D of the TPA are interesting for the following reasons:

1. This cause of action is likely to be rather unusual from the US perspective.
2. It is a "strict liability" cause of action, which means that the plaintiff will not be required to demonstrate that the defendant failed to exercise reasonable care and skill, which is the central inquiry when proving a claim for common law negligence.
3. It is a cause of action which could be alleged by all users of a product which is found to be defective, not merely those who have sustained an injury. This is because their claim is that they were all exposed to an increased risk of injury in using the product and thus are entitled to compensation pursuant to this statutory cause of action.
4. Lack of merchantability could be argued by a plaintiff’s lawyer where a product has been withdrawn or recalled from the market, especially if the reason for the product recall was related to safety issues. It could be alleged, in such circumstances, that the withdrawal or hazard alert amounts to a concession as to lack of merchantable quality.

The statutory causes of action established by Division 2A of Part V are considered to be "strict liability" causes of action.

The policy behind strict liability is to make it easier for plaintiffs to prove their claims, especially where a defendant may possess much of the evidence that a plaintiff would seek to rely upon. However, strict liability still requires a plaintiff to demonstrate a basis for the defendant's liability. This means that the plaintiff must demonstrate that the product purchased or used has some quality or qualities, as a result of the design, manufacture or packaging of the product, which entitle the plaintiff to receive compensation.

The causes of action stated in Division 2A of Part V enable consumers to claim breach of warranties, such as merchantability (section 74D) and fitness for purpose (section 74B), against manufacturers and importers with whom they have no privity of contract. Although infrequently relied upon until recently, these causes of action have been available since 1978.

A breach of Division 2A provisions gives rise to a statutory right to compensation, rather than damages under common law. In Zoneff v Elcom Credit Union (1990) 94 ALR 445 and (1990) ATPR 41-058, it was held that this statutory compensation can include a stress and anxiety component.

Section 74D of the TPA imposes liability on manufacturers or importers who supply goods which are not of merchantable quality. To establish a claim for damages under section 74D, a consumer must prove:

1. a chain of supply of a product from a manufacturer to a consumer;
2. that the supply of goods was made "in trade or commerce";
3. that the goods are not of merchantable quality; and
4. that the consumer has suffered loss or damage by reason that the goods are not of merchantable quality.

"Manufacturer" has a special expanded meaning for the purposes of section 74D to include not only the actual manufacturer of the goods but also a corporation which:

• manufactures the goods;
• holds itself out to the public as a manufacturer;
• applies its name or brand to the goods;
• permits someone to promote the goods as those of the corporation; or
• imports the goods where the actual manufacturer has no presence in Australia.

As a consequence, an action is available against an Australian corporation which permits its name or brand to be applied to goods it supplies, regardless of whether it was responsible for the manufacture of the goods.

A person is deemed to have acquired particular goods as a "consumer" if:

• the price of the goods did not exceed the prescribed amount (AU$40,000); or
• where the price exceeds that amount, the goods were of a kind ordinarily acquired for personal, domestic or household use;

• the person did not acquire the goods or hold themselves out as acquiring them for resupply.

It should be noted that for section 74D to apply, the goods in question must be "of a kind ordinarily acquired for personal, domestic or household use or consumption" (section 74A(2)(a) of the TPA). This test is an objective one, which means that the actual purpose of the person acquiring the goods is irrelevant.

It is arguable that some products such as medicines or vaccines would not be ordinarily acquired in that way. There is US legislation which specifically excludes from the definition of consumer products "drugs" intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease (see section 2052(a)(H) in title 15 Chapter 47 of the US Code as defined in section 321(g) Federal, Food, Drug and Cosmetic Act 21 USC). There is no similar express exclusion in the TPA.

Typically, the most contentious element of the cause of action is whether the goods are of merchantable quality. They are of merchantable quality within the definition of section 74D(3) if they are as fit for the purpose for which goods of that kind are commonly bought as it is reasonable to expect having regard to:

1. any description applied to the goods by the corporation;
2. the price received by the corporation for the goods (if relevant); and
3. all other relevant circumstances.

While purpose and the degree to which purpose is accomplished by the particular goods are regularly the subject of expert evidence, courts have demonstrated reluctance to admit expert evidence or consumer survey evidence to prove "reasonable expectations" as to fitness for purpose.

In Graham Barclay Oysters Pty Ltd v Ryan (2000) 102 FCR 307 at para [533-34], Lindgren J considers the appropriate manner of assessing reasonable expectations in relation to merchantable quality. His Honour states:

The court considered that the expectations of the reasonable consumer could not be measured against the specialist technical knowledge of the distributor and that it was impossible to be sure that the product distributed was in fact safe for the purposes for which it would primarily be used. Instead, the court itself stood in the shoes of the reasonable consumer, or reasonable bystander in the position of the reasonable consumer, and independently assessed the consumer's reasonable expectations of fitness for purpose.

In that case, contamination of oysters with Hepatitis A rendered them unmerchantable as, in the absence of a warning, the reasonable consumer would expect the oysters to be safe to eat. Thus, the test of merchantable quality is an objective test, which asks: what is reasonable for a consumer in the position of the actual consumer to expect?

Division 2A of Part V focuses heavily on consumer expectations without any allowance for balancing the risk of harm against the social utility of the product. Commenting on section 74D of the TPA, Lindgren J in Graham Barclay Oysters at para 538 states that:

Whether a standard based upon consumer expectations strikes an appropriate balance between consumer protection and the social utility of manufacturing products is an issue that requires detailed policy analysis. It is evident, however, that the court's interpretations of consumer expectations under Division 2A of Part V are leaning towards a much more onerous standard of responsibility than was imposed upon manufacturers by common law negligence.

Any warnings provided by the manufacturer or importer in the get-up, labelling, packaging or product inserts will be very important, as they may result in the consumer’s otherwise reasonable expectations being rendered unreasonable.

It should be noted that section 74D does not apply in the following circumstances:

• where the goods are not of merchantable quality (according to section 74D) because of an act or default of another person or a cause independent of human control occurring after the goods left the control of the corporation;
• where the defect was specifically drawn to the consumer's attention before making the contract for supply of the goods to the consumer; and
• if the consumer examined the goods before that contract was made and such examination ought to have revealed the defect.

Again, this raises the importance of any warnings provided by the manufacturer or importer to the consumer and the adequacy of those warnings.

One of the most recent Federal Court decisions regarding the scope of section 74D concerns pacemakers. In June 2000, a class action was commenced in the Federal Court on behalf of persons who had received pacemakers that were the subject of a hazard alert issued earlier that month. The respondents to the proceedings included Medtel Pty Limited, the Australian distributor of the pacemakers.

In Courtney v Medtel Pty Ltd [2003] FCA 36 ("Courtney"), Sackville J considers the application of merchantable quality under sections 74B and 74D of the TPA.

The case was a representative action claiming that a particular batch of pacemakers manufactured by Pacesetter Inc (incorporated in the US with no Australian business), were not of merchantable quality under s 74D of the TPA. Also argued was that the goods were unsuitable under section 74B of the TPA, but this was not discussed in detail, as both sides agreed that if the s 74D action failed, the s 74B action also could not succeed. Medtel Pty Ltd, the Australian distributor of the product (incorporated in New South Wales), was also a respondent.

The pacemakers that were affected by the fault only occurred within a certain period of time. The pacemakers had a problem with their manufacture known as "dendritic growth". Sackville J was satisfied that this dendritic growth was caused by the use of "yellow spool solder" in the product, rather than "blue spool solder" which was used in later unaffected products. These pacemakers were subject to a "Hazard Alert" from the Therapeutic Goods Administration.

Although there was no fault with the yellow spool solder it left a "tenacious crystalline residue" that the blue spool solder did not. Sackville J concluded that when the residue was combined with other contaminants (the use of a "de-soldering wick" leaving other contaminants in the product), this caused a build-up within the pacemaker that led to "dendritic growth", which is essentially a short circuit in the product, causing the life of the battery to decrease dramatically. His Honour was satisfied that this was the cause in the majority of the cases within the class.

Not all pacemakers in the representative action (including the applicant Mr Courtney's) were subject to the actual fault, as only incorrectly soldered pacemakers requiring a de-soldering wick had dendritic growth. However, the fault could not be detected without explanting the pacemaker. This gave rise to three classes of people within the representative action. The first, to which the applicant belonged, was those that had had pacemakers explanted but had found no fault. The second group were those whose pacemakers failed before it was explanted, and the third group were those who had not had the product explanted.

In discussing "merchantable quality", His Honour stated that it was unnecessary to look at the common law definition of merchantability (under the Australian Knitting Mills v Grant principle - (1933) 50 CLR 387), for the purposes of 74D(1). The appropriate starting point was the language of s 74D itself.

He discussed the s 74D(3) test in its three parts; that the product is "fit"; "for the purpose... for which goods of that kind are commonly bought"; and "whether the goods supplied are fit for the purpose... identified as is reasonable to expect". (Clearly also loss or damage must be suffered (s 74D(1)(d).)

1. "The purpose commonly bought"

Regarding the purpose, Sackville J said that whether goods are bought for the purpose they are "commonly bought", is not the individual customer's subjective purpose in acquiring the goods but a broader enquiry regarding the normal use of the goods.

He concluded that it was clear enough that the purpose (common to all the members), was to maintain a regular heart beat for patients experiencing electrical heart problems, and not the wider assertion that it was for the "comfort and assurance of the recipient subject to the ordinary risk of random failure".

2. "Fitness for the purpose"

• the failed pacemaker was manufactured using yellow spool solder; and
• he failure that occurred was not attributed to a cause unconnected with the use of yellow spool solder and the associated short circuit.

As the in situ pacemakers were subject to a significant "superadded" risk of premature failure by reason of the materials used in the manufacturing process, His Honour concluded that they were of unmerchantable quality.

On the point of the applicant's explanted, fully functional pacemaker, Sackville J held that despite it not failing prematurely in situ, the applicant's Pacemaker was not of merchantable quality this was despite the fact that it did not fail because it completed the "fitness for purpose" tests stated above, was manufactured with yellow spool solder, and thus subject to a risk of premature failure. The only difference between the groups would be regarding the quantum of loss and damage.

His Honour concluded that Mr Courtney's pacemaker was manufactured using material which subjected recipients to a materially increased risk of premature battery depletion, rendering the pacemaker was unmerchantable and unfit for purpose, despite the fact that the device continued to function normally.

Of relevance to this application, section 74A of the TPA provided that if goods were imported into Australia by a corporation that was not the manufacturer of the goods and that at the time of importation the manufacturer did not have a place of business in Australia, the corporation was deemed to have manufactured the goods. Medtel was thus liable to pay Mr Courtney damages for pain and suffering in addition to the expense incurred for a new device, and associated unreimbursed costs Medtel had offered to pay.

His Honour did not discuss s74B in any detail but concluded on the same reasoning that the goods were not fit for the purpose under s 74B as under s 74D.

It is somewhat alarming for manufacturers and importers, that although Mr Courtney's pacemaker worked perfectly well and in accordance with its specifications, it was still held to be unmerchantable and unfit for purpose.

An appeal against the judgment of Sackville J was dismissed by the Full Court of the Federal Court: Medtel Pty Ltd v Courtney (2003) 198 ALR 630, per Moore, Branson and Jacobson JJ. The respondents applied for special leave to appeal the Full Court decision to our highest appellate court, the High Court of Australia, but leave was refused without published reasons.

The product liability landscape has changed significantly over the past decade and markedly so in recent years. State and Federal reform in the areas of common law negligence, including the passing of the Civil Liability Act 2002 (NSW), combined with the continuing limitation of personal injury claims under s52 of the TPA, means that the future of product liability litigation will be played out on different terms¹. It appears likely that applicants will avail themselves of the alternative statutory causes of action provided by sections such as 74D (and 74B) of the TPA. Given the way in which section 74D is being interpreted judicially, this is of potential concern to manufacturers as these provisions may impose heavier burdens as a result of the more onerous strict liability standards being applied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.