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Government's product liability proposal defective



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EMBARGOED UNTIL 4.PM

GOVERNM ENTS PRODUCT LIABILITY PROPOSAL DEFECTIVE

ADDRESS BY

MR PETER COSTELLO MP

SHADOW MINISTER FOR CORPORATE LAW REFORM AND CONSUMER AFFAIRS

TO THE METAL TRADES INDUSTRY ASSOCIATION BUSINESS AND COMMERCIAL MANGAEMENT GROUP

HYATT HOTEL, CANBERRA

WEDNESDAY 4 SEPTEMBER

EMBARGOED UNTIL 4.PM

GOVERNMENTS PRODUCT LIABILITY PROPOSAL DEFECTIVE

Last year at the MTIA forum on product liability I described the Australian Law Reform

Commission (ALRC) proposals for a new scheme of product liability as "a flight of

fantasy based on questionable empirical evidence" and called on the Government to

reject them. Senator Janet Powell, on behalf of the Australian Democrats, called on the

Government to accept the ALRC proposal. She seriously informed the meeting that if

the Government did not enact the ALRC scheme the Australian Democrats would seek

to have them enacted. Fortunately, for those concerned about sensible product liability

laws, Senator Janet Powell now has other matters occupying her attention.

A representative of the Government's Caucus Committee on legal matters took what I

would describe as a "canoe approach" to the ALRC recommendations. He paddled a

little to the left and a little to the right without really knowing what direction to go in.

Since then, the Government has announced that it does not accept the ALRC proposal.

This is to be welcomed. In May 1991 the Government put forward its alternative

position which consists of a two-page media statement and a two-page outline of "key

features". The Government says its proposed regime will be based on the European

Community product liability directive although it departs from that directive in a very

significant respect. You will be aware that in a report last year the Industry Commission

(Report No. 4 18th July 1990) concluded the ALRC proposal would have a number of

deleterious effects on economic efficiency.

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DEPARTURE FROM THE INDUSTRY COMMISSION

It is important to recognise that the Government's current proposal is not based on the

report of the Industry Commission. The Industry Commission concluded: -

"An outcome superior to both current laws and the ALRC's proposals could be achieved by relatively minor amendments to current laws. This approach would avoid many of the costs of the ALRC's proposals."

Relatively minor amendments to current laws is not what Senator Tate now has in mind.

The Industry Commission identified three deficiencies in the current law. First, not all

losses caused by defective products are compensated. In particular, it referred to the fact

that non-owners of goods (such as by-standers and children) cannot take action for

breach of contract. Secondly, the Industry Commission found that currently producers

bear liability for some loss that should be born by consumers "thereby providing

incentives for producers to build excessive safety features into their products or to set

prices that over-account for losses caused by the consumption of those products".

Thirdly, the Commission concluded that there was a deficiency in laws relating to onus

of proof where, generally, the person in the best position to gather relevant information

on an issue should bear the onus of proving it.

In my view, product liability laws ought to be changed to remedy the first deficiency and

provide enhanced rights for by-standers and children injured by defective products. At

present the consumer or the buyer has certain rights but if, for example, the child of the

consumer is injured by a product that child may not have the same rights as the

consumer. This deficiency ought to be rectified and I would support action to do so.

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The second deficiency identified by the Industry Commission is important and in any

package of change to product liability laws it is important to allocate liability to the

consumer for assumed risks. The proposals announced by Senator Tate do not deal with

this.

Although the proposals of Senator Tate deal with the onus of proof. In my opinion they

do so wrongly and ought be reformulated.

ALLOCATING LIABILITY

Liability laws are concerned with the allocation of risk for injury and the allocation of the

costs of paying compensation for loss or injury.

At one end of the scale is no-fault liability and automatic compensation. The New

Zealand Accident Compensation Scheme is an extreme example of this. A person

injured in an accident, even if he is at fault, is entitled to compensation. The cost of

paying compensation is borne by the community at large.

A less extreme form of compensation is the various State Workers' Compensation

systems. These are no-fault systems where a person receives compensation for a certain

class of injury incurred while engaged in a certain kind of activity (work related) and

liability for payment is borne by a certain class of persons - employers.

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The common law has traditionally allocated risk on the basis of fault. A person at fault

is required to compensate a person for loss which results from that fault. In tort a

person is compensated for loss caused by negligence. Negligence occurs where the

person has a duty to take reasonable care to those in proximity to him or his product,

where he breaches that duty of care and where loss results. In contract the common law

allocates risk between parties according to their agreement. If a party contracts to

provide goods of a certain standard and if, in breach of the contract, he fails to do so he

is liable for the loss that results. In more recent times there has been statutory

intervention through the Trade Practices Act, Fair Trading Acts and the like which have

implied terms into contracts between parties to allocate risk according to statutory

provisions.

THE GOVERNMENT PROPOSALS

The proposals of the Government are to apply in conjunction with current laws. The

Government has made it clear that "the new law will not supersede or replace any

existing laws". This means manufacturers will still be liable in negligence, contract and

under statutory provisions of the Trade Practices Act. The purpose of the new product

and liability laws is therefore to make manufacturers liable in situations additional to

those where they are currently liable, that is. to make manufacturers liable in

circumstances when they have not been negligent, where they have observed their

contractual obligations as to quality and where they have not breached the current terms

implied by statute.

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COSTS AND BENEFITS

No humane person would argue against improving the safety of products. Improving

safety however is not always cost neutral. The balance required is to find the level at

which safety is protected without making the cost of the product prohibitive.

For example, we could rewrite airline regulations and airline safety standards so that

aeroplanes presented no risk. In the process we could make the cost of flying so high

that hardly anyone would fly. Indeed on a pure abstraction if we made sure no one was

flying we would make sure no one ever suffered loss from faulty aeroplanes.

As the new Chairman of the Civil Aviation Authority has pointed out there is always a

trade-off between safety and price. Because our society believes there is an economic

benefit in allowing flight we are prepared to trade off iron-clad safety to secure flight at

an affordable price.

We could pass a law requiring every driver to drive a Volvo. In the interests of allowing

wider motor vehicle ownership we trade off price against safety and allow people to drive

less safe cars. Higher safety generally means higher cost in product design and

manufacture. Higher safety requirements produce a better product for the wealthy

consumer but at the risk of prohibiting the poorer consumer from obtaining the product.

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Stricter product liability standards will produce safer products but at higher cost.

Widening the opportunity for compensation, and increasing manufacturers liability, has

an inevitable benefit to consumers but also an inevitable cost to the consumer.

INDUSTRY COMMISSION

The Industry Commission made important recommendations on the allocation of risk

under an efficient product liability regime. It said there were three cases where risk

should be allocated to the user: -

. where consumers know the risk and choose to accept it;

. where consumers have a strong desire to accept unknown or ill-defined risks; and

. where risks are so remote that, despite careful investigation, discovery would be

unlikely before their realisation.

This third situation is commonly understood as giving rise to a "state of the art" defence

allowing manufacturers to defend potential liability and allocating risk to the consumer.

Although the precise operation of such a defence is ambiguous under the Government's

current proposal I will accept for present purposes that it proposes to deal with the issue.

What is not dealt with in its statement are the other two situations.

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A) WHERE THE CONSUMER KNOWS THE RISK AND CHOOSES TO ACCEPT

IT

The ALRC recommended a defence based on voluntary assumption of risk. No such

defence is referred to in the statement of product liability reforms put out by the

Government.

Consumers often know risks which they chose to accept. Use of tobacco and alcohol are

examples. The buying of a second-hand car is another. Most consumers understand that

a second-hand car is less safe than a new car but knowing the risk they chose to accept

it for price reasons.

I spent some time reading the Industry Commission report on product liability. It was

poorly printed and it strained my eyes. I don't think I should be entitled to compensation

for eye-strain caused by this defective product considering the fact that I knew the risk

of reading bad type and in the interests of my audience today chose to accept it.

It is important that losses to consumers be borne by consumers when they have

voluntarily chosen to accept the risk.

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B) WHERE THE CONSUMER HAS A DESIRE TO ACCEPT UNKNOWN OR ILL-

DEFINED RISKS

Most Members of Parliament know that there are people who are prepared to accept

unknown or ill-defined risks in using a product. I, and I assume many of colleagues, have

received letters from people who have AIDS urging that the drug AZT or other new

products be distributed for general use in Australia. It is thought that these drugs have

seriously damaging side-effects but many who have AIDS still have a strong desire to use

it for the relief it might bring.

Where people have a desire to use a product notwithstanding unknown or ill-defined

risks that it is defective the loss or injury should be allocated to the user rather than the

manufacturer. The proposals put out by Senator Tate do not address this situation. Any

new product liability laws must take this into account.

THE ONUS OF PROOF

Senator Tate maintains that the Government's new regime will be based on the

European Community objective. It is out of line with that directive in one critical

respect. The directive provides as follows: -

Article 1. "The producer shall be liable for damage caused by defect in his product."

Article 4. "The injured person shall be required to prove the damage, the defect and the causal relationship between defect and damage."

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The onus of proving the defect under the European directive is on the claimant. The

Government proposes to reverse this. It proposes that the manufacturer be required to

show a defect does not exist. This is no incidental or trivial matter. Whilst there are few

cases decided on the onus of proof the question of where it resides influences the whole

approach of parties who may be drawn into litigation and the whole conduct litigation.

For the purposes of illustration imagine the difference if a person was deemed guilty until

proven innocent. As a general rule, the innocent would still be acquitted and the guilty

still convicted. But the administration of justice, the conduct of trials, the dealing with

parties prior to charging would significantly change.

A substantial shift in approach from the European Directive will result from the Tate

proposal. All products which cause injury will be assumed defective until proven

otherwise in litigation. All manufacturers in court actions will be assumed to have

manufactured defective products until proven otherwise. Senator Tate says it is more

efficient for the manufacturer to show no defect than for the claimant to show there was

a defect and this is the "de facto effect of the EC law". If this is the de facto effect of

placing the onus on the claimant why not keep it there and keep that kind of outcome?

What will be the de facto effect of moving the onus, by statute, to the manufacturer?

It can only lead to even more stringent liability. Courts will be entitled to infer that by

moving onus Parliament has invited them, even commanded them, to shift further in

favour of claimants, to shift further in favour of strict liability and shift further away from

fault.

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Reversing the onus of proof also introduces a logical difficulty. It is logically more

difficult to prove a negative than a positive. If I have to prove that it rained today all I

have to do is to find a witness who felt it. If I have to prove it didn't rain today how

many witnesses have to be called to say they felt no rain? As a matter of logic it can

never be proven empirically. This is hardly an efficient way to go about the onus of

proof.

In any event it is not just manufacturers who will bear this onus. The Government

proposes that importers of products manufactured outside Australia will be liable as will

each person in the supply chain where the manufacturer is not identified. Importers

would have no knowledge of production. It is hardly "efficient" to make them prove a

product is not defective when they have taken no role in its manufacture and no part in

its use.

WINNERS AND LOSERS

Under the Government's proposals those who suffer loss will have greater rights. But let

me stress again the rights to be introduced are in excess of those already available.

These proposals are designed to confer greater rights on those who suffer loss through

no negligence, no breach of contract, and no breach of terms implied by statute. The

other great beneficiaries of these proposals will be the lawyers. Every time the

Government enacts new laws it kicks off more work for lawyers.

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On the other hand, consumers generally will suffer. They will pay a higher price for

products. Manufacturers will also suffer. They will be exposed to more litigation. Taken

with the Government's proposal for class actions and proposals by Law Societies to allow

charging of contingency fees the Government's product liability proposals have the

capacity to make Australia the litigation capital of the Asia-Pacific region and a high risk

zone for manufacturers.

There is a case for extending the reach of current laws to innocent by-standers effected

by defective products. There is no case for reversing the onus of proof on the issue of

defect. It is important that the defence of voluntary assumption of risk be introduced to

reallocate liability in such circumstances to users. As a product - the product liability

proposal of the Government is defective. The Government needs to substantially rework

its product before releasing it for general consumption.

Peter Costello

4 September 1991

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