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Part 4: Parting Out Liability - The Reality of Liability Protection Options Buying & Selling a Homebuilt
Joanne Barbera & Jim Ramsey (originally published in EAA Sport Aviation, May 2000)
Over the past few months “Legal Pilot” has been discussing steps builders can take to minimize the possibility of litigation when selling their homebuilts. Before discussing these options, let’s review the legal theories of product liability law. The doctrines discussed are generalized and not specific to any state and differences in the factual circumstances for each case may affect the application of the law.
Commonly referred to as product liability, tort law generally consists of three independent legal theories: strict liability, warranty, and negligence.
Under strict liability, sellers are liable if they sell a defective product that is unreasonably dangerous to users or consumers. For strict liability to apply sellers must be engaged in the business of selling such products and the product must reach users or consumers without substantial change in its condition. If the seller of a homebuilt doesn’t otherwise engage in the business of selling aircraft, then strict liability should not apply. But if a builder sold a number of aircraft or actually built the aircraft to sell it, then a court may find that the sale was within the scope of strict liability.
There are three basic warranties-express warranty, implied warranty of merchantability, and implied warranty of fitness for a particular purpose. Any of these warranties can be either written or oral. The difference between a written and oral warranty is the difficulty of proof as to the warranty’s existence or extent.
Express warranties are any affirmation of fact or promise the seller makes to the buyer relating to the product that becomes part of the bargain that the goods will conform to that promise. No special words, such as warrant or guarantee, create an express warranty. Generally, sellers may give an opinion bout the product’s quality and value without creating express warranty obligations. The question becomes which of the seller’s statements become part of the bargain. This can become a difficult area if sellers aren’t somewhat careful in how they market the aircraft.
There are two implied warranties: the implied warranty of merchantability and the implied warranty of fitness for a particular purpose. The former applies only to merchants of products of the type in the involved transaction, and the seller of a homebuilt normally doesn’t need to be concerned with it. However, as with strict liability, there may be circumstances that result in the seller of a homebuilt being considered a merchant.
An implied warranty of fitness for specific purpose arises when a buyer relies on the seller’s skill, judgment, and experience to furnish him with a product that will answer his particular purpose. The seller’s knowledge of the buyer’s purpose for the article isn’t sufficient to show the buyer’s reliance on the seller’s skill, judgment, or experience that sustains an implied warranty of fitness. Sellers can expressly disclaim an implied warranty with written words such as “as is,” or “with all fault.” Again, this is a warranty that can be avoided by care in marketing or selling the aircraft.
Finally, we have the basic theory of negligence. The elements of a negligence claim are the existence of the defendant’s duty to protect the plaintiff from injury, the failure of the defendant to perform that duty, and an injury to the plaintiff caused by the defendant’s failure to perform that duty.
When selling a homebuilt, the seller has a legal duty to the buyer. For this article, we’ll assume the amateur-built aircraft caused damage to the plaintiff. The issue is whether the seller breached his duty to the buyer. With the exception of professionals, who may come under a higher standard of care, the law requires individuals to exercise a reasonable degree of care in their dealings. If the amateur builder uses reasonable care in building the aircraft, then there would be no negligence. The difficulty arises because a jury generally decides whether an individual used reasonable care.
One often discussed method of liability protection when selling a homebuilt is for the builder to partially disassemble the aircraft before transferring it to the buyer. Builders cannot avoid their liability for their negligent design, workmanship, or maintenance by disassembling the aircraft, and disassembly substantially reduces the homebuilt’s value (often by a third or more).
Based upon the legal principles of negligence, if the aircraft or a component of it fails, or if the aircraft crashes because the builder didn’t use reasonable care in design, construction, or maintenance, the builder will be liable even if the aircraft is partially disassembled before being sold.
Registration Change or Cancellation
In the event of an accident, incident, or other problem with the aircraft, one of the first pieces of information a claimant looks for is registered owner. When you sell your aircraft it’s important to make sure your aircraft bill of sale and the buyer’s aircraft registration application are filed with the FAA Aircraft Registry. Then, if a problem arises after you sell the aircraft, the aircraft record will properly reflect the change of ownership.
Canceling the aircraft’s registration is another method some builders have tried to attain some liability protection when selling a homebuilt. This does not remove the builder’s name from the aircraft record, however. In most cases, a U.S. citizen buyer of a deregistered aircraft can petition the FAA for reregistration. This will reflect the buyer as the aircraft’s owner but it will generally list the same builder information as before the cancellation. The practical effect of the seller canceling the registration may only be to create additional paperwork for the buyer.
Another means of possible liability protection is for a corporation or limited liability company to own the aircraft. Both a corporation and an LLC are business entities that grant limited liability to their owners. If the owner properly capitalizes the organization and observes the organizational formalities, then the organization’s creditors cannot reach the owners’ personal assets, just the organization’s assets.
Corporations and LLCs generally do not shield their owners from the consequences of their own acts and omissions. In other words, if you are a shareholder of a corporation that owns a homebuilt and you personally did not use “reasonable care” in building or maintaining the airplane, then you’ll probably be liable for any damage caused by that mistake. However, as discussed below, transferring your completed aircraft to a corporation or LLC may enable you to come under the protection of the General Aviation Revitalization Act 18 years after the transfer.
General Aviation Revitalization Act
There has been much discussion about the General Aviation Revitalization Act of 1994 (GARA), which establishes an 18-year statute of repose that bars a lawsuit after a number of years after the defendant has acted in some way, such as designing or manufacturing a product. This statute applies even if the period, in this case 18 years, ends before the plaintiff suffers any injury.
This differs from a statute of limitations, which is a set time limiting a legal action after a particular claim or injury arises. GARA’s rolling 18-year statute of repose means that over the life span of an aircraft, each time a component part is replaced, the time for that part begins again. GARA applies to any aircraft with a type certificate or airworthiness certificate that has a maximum of fewer than 20 passengers and was not engaged in scheduled passenger carrying operations.
Four exceptions to GARA aren’t germane to this article: manufacturer misrepresentations made in the certification of the aircraft; instances when the claim is being made by a passenger receiving treatment for medical or other emergency; a claim by a person not aboard the aircraft at the time of the action; or an action brought under a written warranty enforceable under law.
The major issue for amateur builders is when does the limitation period start. The statute defines this time as: (a) the date of delivery of the aircraft to its first purchaser or lessee, if delivered directly from the manufacturer; or (b) the date of first delivery of the aircraft to a person engaged in the business of selling or leasing such aircraft.
Because the GARA time limits commence on the date of the aircraft’s delivery to its first purchaser or from the date of the aircraft’s first delivery to the person whose business is selling or leasing such aircraft, there is a question whether GARA applies to a homebuilt before it’s sold for the first time. No cases discussing such a question have been identified. But there are indications that GARA will not protect amateur builders.
Because GARA is a statute of repose-which extinguish a claimant’s rights rather than set a time limit-the courts have held that the statute of repose must be strictly construed. Such strict construction would hold that the statute of repose begins to run from “the date of delivery,” not the date of assembly or manufacture.
Courts generally hold that if a statute is not ambiguous, they must follow the statutory language. If a statute is found to be ambiguous, then the court may look to the statute’s legislative intent. GARA’s legislative history indicates that it was “developed in response to a serious decline in the manufacture and sale of general aviation aircraft by United States companies.”
In light of these doctrines of statutory construction, it’s possible that a court would find GARA inapplicable to the first sale of a homebuilt. Even though there has apparently been no finding or determination (yet) whether GARA applies to amateur-built aircraft, counting on its availability would not be wise. But if a builder wanted to plan ahead, after the homebuilt was completed, the builder could sell it to a separate corporation set up for that purpose. Then, 18 years later, they may have a GARA defense if needed.
Jim Ramsey and Joanne Barbera are attorneys with the Kansas City-based law firm of Cooling & Herbers, P.C, which practices extensively in aviation law. Jim Cooling, managing partner of the firm, is a member of the EAA Legal Advisory Council.