BUSINESS ETHICS

Handout

Lecture No, 36
The main objections to the contractual theory maintain that the assumptions on
which the theory is based are unrealistic. Manufacturers do not deal directly with
consumers. They do deal indirectly with them through advertisements, however,
and promoters of the theory argue that advertisements forge the indirect
contractual relationship between seller and the buyer.

Another objection to the theory points out that consumers can freely agree to
purchase a product without certain qualities. Manufacturers can be released from
normal contractual obligations simply by disclaiming that the product is safe and
reliable. Disclaimers can, in effect, nullify all of the seller's contractual duties.

Finally, critics of this theory point out that the assumption that buyer and seller
meet on equal ground is false. Buyers and sellers are not equally skilled; the
seller is in a much stronger position than the buyer. Sellers only have to know
their own products, while buyers need to know about every sellers' products for
every commodity they purchase.

Another objection to the theory points out that consumers can freely agree to
purchase a product without certain qualities. Manufacturers can be released from
normal contractual obligations simply by disclaiming that the product is safe and
reliable. Disclaimers can, in effect, nullify all of the seller's contractual duties.

Finally, critics of this theory point out that the assumption that buyer and seller
meet on equal ground is false. Buyers and sellers are not equally skilled; the
seller is in a much stronger position than the buyer. Sellers only have to know
their own products, while buyers need to know about every sellers' products for
every commodity they purchase.

6.3 The Due Care Theory

The due care theory of the manufacturer's duties to consumers is based on

the idea that consumers and sellers do not meet as equals and the consumer's
interests are particularly vulnerable to being harmed by the manufacturer, who
has a knowledge and an expertise that the consumer lacks. Because
manufacturers are in a more advantaged position, they have a duty to take
special care to ensure that the products they offer do not harm the consumers'
interests. The doctrine of caveat emptor is here replaced with a weak version of
the doctrine of caveat vendor. Let the seller take care. Because consumers
must rely on the expertise of the manufacturer, they have a duty not only to
deliver a product that lives up to the express and implied claims they make about
it. They have a duty to exercise due care to prevent others from being injured by
the product, even if they explicitly disclaim such responsibility.

Due care must enter into the product's design, choice of materials and
construction methods, quality control, and warnings attached to it. Failure to
exercise due care in these areas is a breach of the manufacturer's moral duties.
This theory rests on the principle that agents have a moral duty not to harm or
injure others. The principle can be defended by the ethics of care, of course, but
rule utilitarianism, Kant, and Rawls can all also be used as a solid basis for the
theory.
Manufacturers' responsibilities to exercise due care extend to the following three
areas:
1. Design - a product's design should not conceal any dangers, should
incorporate all feasible safety devices, and use adequate materials. The
design should additionally be well tested to ensure that consumers will use
the product properly.
2. Production - the manufacturing process must be controlled to eliminate
any defective items, identify weaknesses, and ensure that unsafe
economizing measures are not taken.
3. Information - the firm should fix labels, notices, and instructions on the
product warning of all potential dangers involved in using or misusing the
item.

Manufacturers must also take into consideration the capacities of the persons
who they expect will use the product. If the possible harmful effects of using a
product are serious or if they cannot be adequately understood without expert
opinion, then sale of the product should be carefully controlled.

There are three difficulties with the due care theory. The basic problem with it is
that there is no way to determine when one has exercised enough due care.
Every product involves some small risk; if all risks were eliminated, few if any
products would be affordable. Secondly, the theory assumes that the
manufacturer can indeed discover all the risks attendant upon using a product
before it is actually used and this may not be possible. Finally, the theory is to
some, paternalistic, assuming that the manufacturer alone should make the
important decisions about the level of risk the consumer should bear. Perhaps
such decisions should be left up to consumers, who can decide for themselves
whether or not they want to pay for additional safety measures.
Key Terms
brand loyalty the result of effective advertising campaigns on
consumers, which gives large corporations control
over a major portion of the market.
caveat emptor "let the buyer beware."
caveat vendor "let the seller beware."
commercial advertising communication between a seller and potential
buyers that is publicly addressed to a mass
audience and is intended to induce several
members of this audience to buy the seller’s
products.
contractual theory (of a the view that the relationship between a business
seller's duties) and its customers is a contractual one; the moral
duties to the customer are those created by this
contract.
disclaimer a statement made by a seller explicitly disclaiming
that the product is reliable, serviceable, or safe.
due care theory (of a the theory that, since consumers must depend on
seller's duties) the greater expertise of the manufacturer, the
manufacturer not only has a duty to deliver a
product that lives up to the express and implied
claims about it, but also has a duty to exercise due
care to prevent others from being injured by the
product--even if the manufacturer explicitly
disclaims such responsibility.
duty not to coerce the duty of a seller not to take advantage of
gullibility, immaturity, ignorance, or any other
factor that might reduce the buyer's ability to make
a rational choice.
duty not to misrepresent the duty of a seller not to deliberately deceive the
buyer into thinking something about a product that
the seller knows is false.
duty of disclosure the duty of a seller to inform the buyer of any facts
about the product that would affect the decision to
purchase it.
duty to comply according to the contractual theory, the seller has a
duty to carry through on any implied claims he
knowingly makes about the product.
free riders individuals who acquire a benefit paid for by
others who desire the same benefit.
implied claim a claim about the quality or character of a product
that is knowingly,though not explicitly, made by a
seller.
implied warranty the indirect contractual relationship made between
a company and its customers by its
advertisements.
maintainability the ease with which a product can be repaired and
kept in operating condition.
market approach to consumer safety is seen as a good that is most
consumer protection efficiently provided through the mechanism of the
free market whereby sellers must respond to
consumer demands.
physical privacy privacy with respect to a person’s physical
activities.
production costs / selling with reference to advertising, production costs are
costs the costs of the resources consumed in producing a
product; selling costs are the additional costs of
resources that do not go into changing the product
but rather are invested in persuading people to buy
it.
product safety implied and express claims that refer to the degree
of risk associated with using a product.
psychological privacy privacy with respect to a person’s inner life.
rational utility maximizer a person who has a well-defined and consistent set
of preferences, and who is certain how personal
choices will affect those preferences.
reasonable risk a risk that is known and judged to be acceptable
by the buyer.
reliability the probability that a product will function as the
consumer is led to expect.
right to privacy the right of persons to determine what, to whom,
and how much information about themselves will
be disclosed to other parties.
selling costs the additional costs of resources that do not go into
changing the product, but are invested instead in
persuading people to buy the product.
service life the period of time during which a product will
function as effectively as the consumer is led to
expect it to function.
social costs theory (of a the theory that the duties of the manufacturer
seller's duties) extend far beyond those imposed by contractual
and due care duties; manufacturers should pay the
cost of any injuries sustained through any defects
in their products, even when they exercise due
care and have taken all reasonable precautions.
(Related to the legal doctrine of strict liability.)
strict liability a legal doctrine that holds that manufacturers must
bear the “external” costs of injuries resulting from
unavoidable defects in the design of an artifact
constitute part of the costs society must pay for
producing and using an artifact.