Loss shifting: upstream common law indemnity in products liability.

• Author: Cetkovic, Dragan M.

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. This goal is desirable, but because of various interpretations and different legal requirements, the theory does not have much practical value or advantage. Unfortunately, as the leading commentators concluded, "it is extremely difficult to state any general rule or principle as to when indemnity will be allowed and when it will not."(4)

Indemnity is an appropriate mechanism for achieving economically efficient loss shifting along the chain of distribution. Common law indemnity enables the burden for product safety to be shifted in accordance with free market principles as well as public policy interests. Upstream indemnity should be preserved in its original form to assure unimpeded shifting of the loss toward the source of the defective product.

COMMON LAW INDENITY

1. Distinction Between Contribution and Indemnity

   As a by-product of rapid economic and industrial development, the social policy of consumer protection has resulted in adoption of the legal theory of strict liability for defective products. Courts and legislatures have eased the burden of proof an injured party must meet in order to recover against commercial players. At the same time, channels of trade have became longer and more complex.

   This multiparty character of domestic and international commerce has determined the character of products liability litigation. Liability for defective products has been extended to all participants in the marketing chain.(5) Crossclaims and third-party claims for indemnity and contribution are asserted as a matter of course. Traditionally, an indemnitee's fault precluded an indemnity action, but since fault has ceased to play a significant role in product liability cases, the theoretical chances for obtaining indemnity have increased significantly.

   Issues of indemnity and contribution possibly arise whenever more than one party may be liable for a plaintiff's injury.(6) While indemnity and contribution are remedies possibly available to torfeasors found to be jointly liable for an injury, they are mutually inconsistent remedies.(7) If a party is entitled to contribution, indemnity is not available as a matter of law. Conversely, if a party is entitled to indemnity, it will not be required to contribute. While contribution is allowed among parties jointly responsible for the loss,(8) in products liability settings, indemnity shifts the entire loss from a tortfeasor only technically or constructively liable to the party primarily responsible for the loss.(9) Although some authors advocate overlapping and merger of the two remedies,(10) the underlying policies clearly indicate distinct origins and application.

   The effect of contribution is that the loss is distributed among the tortfeasors. One who discharges joint liability is entitled to receive payment from other tortfeasors in the amount of their proportionate shares of the loss. The effect of indemnity is that party entitled to indemnity will be reimbursed in full for the loss incurred. Generally, contribution is a statutory remedy, while indemnity is a judicial doctrine built on equitable principles.(11)

   Courts in the jurisdictions that maintain a clear distinction between contribution and indemnity generally hold that in the products liability context only vicariously or technically liable persons will be entitled to indemnity from the person primarily responsible,(12) while for those at fault, the only remedy is contribution.(13)

   The Uniform Contribution Among Tortfeasors Act expressly preserves the right to indemnity. Section 1(e) of the act states: "This chapter shall not impair any right of indemnity under existing law. Where one tortfeasor is entitled to indemnity from another, the right of the indemnity obligee shall be for indemnity and not for contribution, and the indemnity obligor shall not be entitled to contribution from the obligee for any portion of his indemnity obligation." The act does not define indemnity, but rather establishes that if a right to indemnity exists, then it is the primary and exclusive remedy, extinguishing the right to contribution. In other words, the rule can be stated that joint tortfeasor A will be entitled to contribution from joint tortfeasor B, unless B is entitled to indemnity from A. Viewed this way, indemnity is a defense to a contribution claim.

   The original act adopted pro rata sharing by tortfeasors of the entire liability. However, states differ on the issue of whether relative degrees of fault should be considered in the determination of each tortfeasor's share. In any event, the right of contribution exists only in favor of joint tortfeasors who have paid more than their pro rata or actual share of the common liability. If the right to indemnity is preserved in a particular jurisdiction and the tortfeasor is entitled to indemnity from someone, then no one would be able to obtain contribution from him or her. In effect, the act recognizes indemnity as a superior remedy.

   OPPOSING JUDICIAL VIEWS

   The development of products liability law presented the courts with the issue of the availability of contribution and indemnity among the parties in the chain of commerce. Are the traditional principles of indemnity equitable and worth preserving when the parties attempt to shift losses upward along the lines of distribution? The divergent judicial views on this issue create significant legal uncertainty as to the ultimate consequences of product distribution.

   To understand these views, it is important to analyze the rationale of the public policy arguments courts use. There are two basic approaches. The first is based on the theory of shared responsibility and the merger of indemnity and contribution into a remedy of partial indemnification, while the second maintains a clear distinction between the two remedies based on the difference between legal (secondary) and culpable (primary) fault.

   A good...