Introduction
On September 13 2017 the Supreme Court passed down its decision in a
product liability appeal case between a manufacturer of marine engines and a
Danish ship owner. The pivotal question before the Supreme Court was the
distinction between damage to:
- the
defective product itself, which was not compensable under product liability
law; and
- other
property, which was compensable.
A plaintiff ship owner (S) ordered 10 gas carrier new buildings between
2007 and 2010, seven of which were sister ships delivered by a Korean shipyard
(Y). The defendant, a marine engine manufacturer (M), was engaged as a
subcontractor.
The marine engines were fitted with an electronic cylinder
lubricating system designed to reduce friction within the cylinder, as the
pistons moved to and fro, thus allowing for better engine durability. Although
more expensive than mechanical lubricating systems, the reduced lubricant
consumption enabled by the electronic system made it the best economic choice,
with an estimated payback period of less than two years.
However, after a period of service, the piston crown, liner and rings
had been exposed to extraordinary wear damages, requiring overhaul and
maintenance work to be carried out earlier than anticipated. S submitted that
the considerable wear damages inflicted on seven of its ships' engines had been
caused by a defect in the lubricating system and claimed $4,426,557.43 in
damages for the losses incurred, including:
- direct
and indirect expenses (ie, spare parts, repair costs and port and pilot
fees);
- time
loss; and
- bunker
expenses.
When the contract was drawn up, the electronic lubricating system had
been applied only in larger marine engines of 60, 80 and 90 cm and not in the
smaller 35 cm engines in question.
Given the absence of a contractual relationship between S and M, S
brought a direct claim against M under the rules on product liability developed
in Danish case law. When the claim for damages was brought against M, the
guarantee period and the period of notice for non-conformities had elapsed
under the contracts between S and Y and Y and M.
A key hurdle for S was convincing the court that the wear damages,
which were allegedly caused by M's lubricating system, constituted 'product
damage' under Danish product liability law (ie, that the product delivered by M
had inflicted damage to property other than that which had been delivered, and
not merely to the product itself).
While the self-inflicted damage could have caused a contractual claim
between S and Y for non-conformities, a product damage could merit a product
liability claim for damages directly against M.
S argued that as the electronic lubricating system in both technical
and economic terms could be distinguished from the engine and replaced by a
different mechanical lubricating system, the lubricating system and the engines
delivered by M constituted distinct and individual components. This was further
supported by the fact that on choosing the engines, S was presented with a
choice between the electronic lubricating system and a mechanical system. The
damage therefore constituted product damage inflicted to "other
property".
M argued that the damage in question should be considered damage to
the product itself. The fact that the engines could be separated into component
parts did not, in the defendant's view, merit a finding that the system had
been sold and delivered as an individual product. M further argued before the
Supreme Court that the relevant test was to examine what M had sold as a unit
to its contractual counterpart Y.
The Maritime and Commercial High Court found that the electronic
lubricating system constituted a product, rendering the damages inflicted on
the engine components product damage to other property, as required under
product liability law.
The court explicitly emphasized that:
- the
use of the electronic lubricating system when the contract was made should
be considered a novel development for such smaller types of marine
engines; and
- M
had promoted the system as a distinct product in a special campaign with
the potential of facilitating considerable savings.
The Supreme Court reversed the first-instance decision and explicitly
distanced itself from this rationale, stating that the fact that S had chosen
the electronic lubricating system in question could not justify such a result.
On the contrary, the court found it apposite to reiterate its
previous decision in Masnedø
(published in UfR 2010.1360 H), wherein it had decided whether a producer of a
defective component, which had been integrated into a product acquired by a
later buyer, could be held liable under the Danish product liability rules.
Pursuant to Masnedø,
the relevant test when distinguishing between the product in question and other
property is to consider what has been sold as a unit to the plaintiff by its
contractual counterpart.
Accordingly, in order to determine whether the damage constituted
damage to other property, the correct test was to consider what had been
acquired as a unit by S – in this case, the ship – as opposed to what had been
delivered by M to Y.
The Supreme Court noted that the defendant's counsel had not made
this point during the proceedings. However, this did not change the final
outcome, as the court went on to find that the marine engines and the appurtenant
electronic cylinder lubricating system had been sold as a single unit to Y by
M. The product sold by M had therefore not caused damage to other property.
Therefore, the losses claimed for by S, to the extent that they had
been caused by an alleged defect in the lubricating system, constituted damage
to the product itself and, as such, were not recoverable under product
liability law.
To a non-Danish reader, it is noteworthy that the Danish product
liability regime is twofold. Whereas the EU Product Liability Directive
(85/374/EEC) has been implemented in Danish law by statute (Produktansvarsloven), the other regime
is a result of Danish case law as developed and interpreted by the courts.
Compared to the EU directive, the latter regime further permits compensation
for damage to property that is not ordinarily intended for private use and
consumption and does not make compensation contingent on whether the property
was in fact used privately (compare with Article 9(b)(i-ii) of the EU directive).
In general product liability law, the delimitation between liability
for the non-conformity of goods covered by the Danish Sale of Goods Act and the
rules on product liability for defective products remains a classic conundrum.
The producer will be held liable for damage caused by a defect in its
product, commonly defined as physical damage to property other than the product
itself. Cases wherein the product causes damage to itself are therefore
assessed outside the scope of the product liability regime. Such damages must
instead be determined under contract law and the rules on the non-conformity of
goods.
In this particular case, the Supreme Court underlined the test
previously set out in Masnedø,
stipulating that the correct test when making the distinction is to examine
what the claimant has acquired from its immediate contractual counterparty.
Damage caused by a component part to an end product in which the component is
integrated can provide grounds for a contractual claim only against the seller.
In the case at hand, there were no contractual relations between S and M, and
the unit that S had acquired from Y was a ship. The claim therefore had no
merit under product liability law.
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