Legal and Regulatory

Navigating Liability for Defective Products

To avoid defective product liability, work with suppliers who stand behind their product and take steps to spread the risk to suppliers, such as being named as an additional insured.
By Miles M. Masog
August 28, 2018
Legal and Regulatory

Starting in 2000, developers began to commonly use flexible plastic piping (for example PEX piping) instead of metal piping for supplying water to fixtures and appliances in newly constructed condominiums, apartments, commercial buildings and single-family residences.

When flexible plastic piping systems are used, brass fittings are needed to connect two pieces of pipe together and so that piping coming from the wall can connect with water heaters and other appliances. Brass is an alloy of copper and zinc, but yellow brass contains more than 30 percent zinc.

While cheaper and easier to machine than most types of brass, issues with yellow brass soon started to crop up, leading to high premature failure rates for plumbing systems using it. Because of the failure rate and the high cost of remediation, construction projects over the past 10 years have increasingly opted to use the more expensive red brass fittings, meaning that yellow brass lawsuits are on the decline and may one day, cease to exist.

However, while yellow brass lawsuits are ebbing, it is important to try and learn the lessons of yellow brass litigation.

Suppliers Matter

General contractors can be tempted to purchase the cheapest product from the cheapest supplier. However, in an increasingly interconnected and global economy, general contractors should make sure that they can first count on their suppliers to stand behind their product and help to solve problems before the parties are forced to resort to litigation.

The best settlement is the one that occurs before litigation ever occurs and before attorneys and experts are hired. If litigation does occur, it is important that general contractors be able to spread the risk to suppliers, if there are problems. While saving $200 to $300 for each fitting may look great on paper, if a plumbing supplier’s global headquarters are in Helsinki and the factory that machined the product is in Shanghai, who does the contractor turn to if that product ultimately fails?

Will that $200 to $300 savings per unit turn into a $700 to $800 loss per unit, when litigation costs and settlements are taken into account? In short, it is important that general contractors vet their suppliers to make sure that their suppliers will stand behind their product and in order to ensure that they can hold their suppliers accountable, if the product that the general contractor purchased causes problems.

Supply Contracts Matter

All too often, a general contractor issues a generic purchase order and a supplier issues a generic invoice and the two documents comprise the totality of the contract between a general contractor and a supplier. If problems arise, there is generally no indication about who is responsible for remedying such problems. Additionally, the nature of a generic supply contract is that the generic UCC rules apply. Under the UCC, the statute of limitations is four years, and the UCC’s statute of limitations specifically indicates that a discovery rule does not apply.

That is to say that, generally speaking, four years after the product has been delivered, a general contractor has no recourse against a supplier through the UCC, absent a warranty to the contrary.

General contractors often spend a lot of time on subcontracts in order to ensure that they will protect their interests. Those same general contractors will often send out generic purchase orders to their suppliers. It is important that general contractors push to add duties to defend and indemnify and an obligation to hold the general contractor harmless in the supply contracts. They further include indicating that limitations on liability on invoices as between the general contractor and the supplier are a nullity.

In short, it is important that general contractors spend the same time and energy on supply contracts that they spend on subcontracts. It is important that the supply contracts include language that protects the general contractor as well or better than the subcontracts with the subcontractors.

In contrast to subcontractors, suppliers often will be in a better position to demand changes to supply contracts. If general contractors run into such suppliers, it is important that general contractors do whatever they can to protect their interests.

A general contractor can include terms and conditions on purchase orders. While not perfect, the terms and conditions are almost invariably better than nothing. Arguably, by supplying the products in the purchase orders and accepting payments, the suppliers have agreed to the terms and conditions. Additionally, general contractors can ask for and keep copies of warranties in their construction files.

Both are good (although not optimal) ways for general contractors to protect themselves from a product failure.

Do the Homework

As part of the supply contract, a general contractor can include an obligation by the supplier to name them as an additional insured under the supplier’s insurance contract. Being named as an additional insured under a supplier insurance policy will add extra protection for a general contract, should the product cause problems at the jobsite.

If a supplier is headquartered outside of the U.S., it is important that they have insurance that will cover damages caused by their product in the United States. If a general contractor does not have the clout to negotiate a right to be named as an additional insured into an agreement with a supplier, it is important that a general contractor request and receive a supplier’s certificate of insurance, in order to ensure that, even if the supplier cannot be found, the general contractor can recover from a supplier’s insurance company.

Maintain Control

Several general contractors allow their subcontractors to independently contract with suppliers. Typically, this does not matter.

However, in projects that include an owner-controlled or wrap-up insurance policy, a subcontractor contracting directly with a supplier often eliminates several causes of action that a general contractor could bring against a supplier. In the case of an owner-controlled or a wrap-up insurance policy, it is important that the general contractor directly contract with the supplier. In that way, the general contractor will ensure that it will be able to make a claim directly against the supplier and will not need to rely on suing the subcontractor.

As discussed above, over the past 10 years, yellow brass litigation has decreased, as general contractors have increasingly opted to use the more expensive red brass fittings. It is important to learn the lessons of yellow brass litigation in order to ensure that a general contractor is protected from the next wave of mass product litigation.

by Miles M. Masog
Miles Masog's practice serves clients in the construction and insurance industries. He has experience litigating matters ranging from construction defects to insurance defense.

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