Massive Toyota Recall Should Jolt Businesses to Revisit Product Liability Practices

The scale of Toyota's recent defect and recall issues is staggering. And, so is the likely impact to sales and budgets. It is difficult to imagine how much Toyota and its relevant suppliers are spending on lawyers, experts, public relations consultants and the like. This probably will continue for years as lawsuits are filed and litigated.

Accordingly, there is no better time than now for virtually all businesses to assess and reconsider their risk management practices, including for product liability claims. In my experience, many, if not most, companies pay little attention to this because of the crush of everyday pressures.

The appropriate response of course will depend upon what the type of business; providing goods rather than services; serving consumers rather than businesses; manufacturing rather than distribution. More industrial or consumer types of businesses may need to monitor regulations, standards and closely. Some must carefully evaluate the quality processes of suppliers and their own operations. Others may benefit from looking for gaps in insurance coverages, such as those applicable to privacy, network or environmental risks.

No matter the client or business, some simple improvement to contracting methods usually is in order. Consistently following these few basic steps will significantly reduce potential exposure:

  1. Keep warranties as narrow and short as reasonable and feasible. Care should be taken to not guarantee results, unintended uses, security or performance longer than three, six or twelve months.
  2. Disclaim all warranties other than those expressly stated. Courts and statutes may find that implied warranties, such as those for merchantability or fitness for a particular purpose, apply if not waived in writing.
  3. Limit liability to ordinary, direct damages, such as purchase price or out-of-pocket costs. Exclude liability for punitive or consequential damages, such as for lost profits or business interruption.
  4. Cap total maximum liability for a transaction. For example, it may be appropriate to limit responsibility to $100,000 or $500,000 when providing a product or service costing significantly less than those levels.

These measures are common and usually acceptable. However, in some cases, federal or state law will override express disclaimers and require more favorable protections for consumers. And, regardless of contract provisions, sometimes accepting greater liability is needed to maintain a long-term business relationship with a customer. Still, overall, there usually is minimal downside to being conservative.

Our Chicago business lawyers are experienced in risk management measures and can help you quickly and affordably develop the approach right for your situation.