Product Liability and Agency Law
When your lawyer has wrapped up his explanation of warranties and ways of breaching them, you feel compelled to ask one last question: Why is Ladders ’N’ Things, an entire corporate chain of retail stores, liable for breach of warranty committed by one department manager at one local outlet? Your lawyer replies that it’s a matter of agency, which he defines for you as a legal relationship between two parties in which one party acts on behalf of, and under the control of, another. In a principal-agent relationship like the one diagrammed in Figure 1, “Agency Relationship,” below, the agent is acting on behalf of the principal.
Figure 1. Agency Relationship
A lawyer acting on behalf of a client is an agent, as is a real estate broker acting on behalf of a homeowner or a partner acting on behalf of a partnership. Perhaps the most common type of agency relationship is the one that applies to your case—the salesperson who’s acting on behalf of a retailer. If this sort of legal arrangement sounds familiar, that’s probably because employer-employee relationships are also agency relationships.
Agency law is actually a mixture of contract law and tort law. In order to appoint an agent, for example, a person must possess the capacity—the legal ability—to make a contract, and agency agreements must in general meet the four elements of a valid contract that we discussed in an earlier section of this chapter. As we’ve also seen, an agent (such as the department manager at your local Ladders ’N’ Things outlet) can make the principal for whom he or she is acting liable for such torts as breach of warranty. The same thing is true of the warehouse manager who stored your ladder next to a shipment of liquid-nitrogen–based fertilizer; acting on behalf of Ladders ’N’ Things, he or she exposed the company to liability for negligence.
Seeking Damages
So, what’s your best course of action? You could sue both the manufacturer and the retailer, but to streamline things, your lawyer files only a strict-liability suit against the manufacturer, who agrees to settle out of court and pay damages. The manufacturer subsequently sues Ladders ’N’ Things, charging that the retailer’s negligence and breach of warranty were contributing causes of your injury. The jury agrees that the retailer’s actions were proximate causes of your injury and orders Ladders ’N’ Things to contribute to the fund of damages that the manufacturer has agreed to pay you.
The Goals of Tort Law
Imposing damages is the chief means by which the legal system meets the primary goal of tort law—compensating injured parties, or, more precisely, restoring victims to the conditions that they would have been in had their injuries never taken place. As we just saw, you settled out of court, but only after your attorney had notified the ladder manufacturer of your intent to seek damages. As the victim of a tort, you may have sought two major types of damages.
Compensatory Damages
The most common type of damages sought by plaintiffs, compensatory damages are monetary awards intended to meet the primary goal of legal action in tort cases. Some measures of compensatory damages are easier to establish than others—say, such expenses as medical costs. Likewise, if your injury keeps you from working at your job or profession, the court can calculate the amount that you would have earned while you were incapacitated. Things get more complicated when plaintiffs make claims involving pain and suffering or emotional distress (which may include both present and future physical and mental impairment). In deciding whether or not to award compensatory damages for such claims, it’s the job of judges and juries to use common sense, good judgment, and general experience.
Punitive Damages
Awarded in addition to compensatory damages, punitive damages are intended to deter similar injurious conduct in the future. Some experts regard punitive damages as particularly useful in discouraging manufacturers from making unsafe products: if there were no risk of punitive damages, they argue, a manufacturer might find it cheaper to market an unsafe product and compensate injured consumers than to develop a safer product. To determine whether punitive damages are called for, a court usually considers “the degree of reprehensibility of the defendant’s conduct”—that is, the extent to which the defendant’s action was flagrant or unconscionable.
The Goals of Contract Law
Note that basically the same types of damages are available in cases involving contract law, which we discussed previously. In contract law, the purpose of imposing monetary damages is to correct the wrong done when a contract is breached. Compensatory damages are paid by the party that breached the contract to compensate for losses suffered by the nonbreaching party. As in tort law, in other words, compensatory damages are awarded to restore the victim (the nonbreaching party) to the condition that he or she (or it) would have been in had the contract not been breached. Because each party entered into the contractual bargain in order to receive some benefit from it, the purpose of compensatory damages is to restore the “benefit of the bargain” to the nonbreaching party.
Courts typically don’t award punitive damages for breach of contract. They may be considered, however, if the breaching of the contract is accompanied by some kind of intentional tort, such as fraud or intentional failure to act fairly in discharging the contract. The purpose of punitive damages is to punish the breaching party, to deter it from similar conduct in the future, and to set an example for other parties to legal contracts.
As you can see from Figure 2, “Remedies for Breach,” below, there are two categories of contractual breach. A minor breach occurs when the breaching party has achieved a level of substantial performance—that is, completed nearly all the terms of the contract. In the event of a minor breach, the nonbreaching party may seek damages. A material break occurs when one party renders inferior performance—performance that destroys the value of the contract. In such cases, the nonbreaching party may seek to rescind the contract and to recover damages to compensate for any payments made to the breaching party.
Figure 2. Remedies for Breach