Loss Shifting: Upstream Common Law Indemnity in Products Liability

Article excerpt

THE DOCTRINE of common law indemnity is becoming increasingly important in modern tort law because of the development of strict liability for injuries caused by products that are "defective and unreasonably dangerous" to the user or consumer, to use the language of Section 402A of the Restatement (Second) of Torts, and because of the multi-party character of products liability litigation. The common law principle that the party at fault cannot seek indemnity is no longer an obstacle; courts impose strict liability regardless of fault. As a general rule, strict liability is imposed on all product sellers in the marketing chain, and under commercial law principles, a seller can breach a warranty without being negligent.

These parallel theories of liability without fault--Section 402A and Uniform Commercial Code warranties--have opened new ways for the application of indemnity. The chain of commerce through which a product is distributed includes many non-manufacturing links--retailers, wholesalers, importers, exporters and distributors, as examples. According to the theory of strict products liability, those parties can be liable to an injured person without fault of their own, and if the plaintiff in multiparty litigation decides to proceed on strict liability only, the question of fault and ultimate responsibility remains unanswered unless the defendants assert rights to indemnity among themselves.

Suits against non-manufacturers inevitable forster attempts to shift the losses back up the distributional chain to the manufacturer. Who is to blame for a defective product? Everyone in the stream of distribution or just the manufacturer? Who should ultimately "pick up the tab"? Should the liability be apportioned between all commercial entities or shifted to the manufacturer?

The courts are attempting to find answers to these questions on a case-by-case basis by applying doctrines of indemnity or contribution. Strong judicial emphasis on various policy goals often overshadows the equitable legal principles of indemnity actions.(1) Judicial results have been inconsisent, and they present no firm criteria for determining who should bear the ultimate responsibility for a loss sustained by a consumer.

Are the policy goals of products liability achieved when an injured party recovers not-withstanding the fact that the supplier of the product is not at fault? Is the policy objective of risk shifting satisfied when the loss is transferred from an injured person to any commercial entity in the chain of distribution?(2) Or should public policy require that only the ultimately responsible party bear the loss? The issue of who will be able to shift the loss within the chain of distribution and how is not just one of a practical legal importance, but it also entails important economic consequences.

The legal theories of loss shifting (indemnity) or loss sharing (contribution) are important to defense counsel for both manufacturers and non-manufacturing sellers. While a retailer's counsel will seek full reimbursement for the loss from the parties up the distribution chain, a manufacturer's counsel will attempt to share the loss by obtaining contribution from all the entities in distribution.(3)

Considering the complexity and size of the U.S. economy, uncertainty relative to the ultimate legal consequences of product sales is discouraging at best. Non-manufacturers in the distribution chain make up a large part of the economy. Their burden of defending products liability suits is heavy, and they cannot void strict or warranty liability for the products they sell, although they do not participate in product design or manufacture. But the burden is not just defense. The important task is how to recover potential losses from teh party higher up in the chain--the party that supplied the defective product to the ultimate seller.

Indemnity, if allowed, would shift the loss. Founded on the concept of restitution and based on equitable principles, indemnity originally was envisioned as a doctrine to prevent unjust enrichment. …