Lloyd's Maritime and Commercial Law Quarterly
“LIKE FLEAS TO A DOG”
Professor Derrick Owles
LL.M., Ph.D. (London), F.C.C.A., F.C.M.A., F.C.I.S., F.I.L., Department of Administrative Studies, Glassboro State College, Glassboro, New Jersey.
In Ortiz v. South Bend Lathe (120 Cal. Rep. 556) the California Court had to decide whether a product liability claim could be sustained against the purchaser of the business of the original manufacturer. In a dissenting judgment, Fleming, J., said:
“Product liability today has become an integral part of a manufacturing business and the liability attaches to the business like fleas to a dog, where it remains imbedded regardless of changes in ownership of the business.”
When, therefore, a corporation takes over another, or buys the assets of another, the question arises: has the purchaser bought more than he bargained for? Has it taken over not only a business, but also a potential liability for injuries that may not as yet have happened?
The general rule is clear: the sale of corporate property by one company to another does not make the purchaser liable for the liabilities of the seller not assumed by it. What is not so clear is the full extent of the exceptions to this rule. In general terms, obligations of a selling corporation are imposed on a buyer in the following situations:—
1. Where there is an agreement to assume such obligations.
2. Where there is in effect a consolidation or merger.
3. Where the purchaser is merely a continuation of the selling corporation.
4. When the sale is fraudulent.
Agreement to assume obligations
An agreement to assume the vendor’s obligations may be express or implied, and it would be unusual for a buyer to expressly assume what might be a remote potential liability. The more likely possibility is that an injured person will seek to show an implied assumption of tort liabilities. Thus, in Boulton v. Litton Industries ([1970] 423 F. 2d 643) it was held that under New York law there was an implied assumption of the obligation to pay compensation for product liability claims arising after the transfer of the corporation’s assets. The claims arose from a failure of aircraft arresting engines that had been made and sold by the transferor corporation four years before the transfer. The transfer contract listed specific liabilities to be assumed, including liabilities arising out of “all other contracts and commitments entered into in the regular and ordinary course of the business.” The absence of specific reference to product liability claims was not significant in view of the broad categories of liabilities that were mentioned in the agreement.
It seems that great care in drafting agreements is necessary to avoid an implied assumption of product liability claims.
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