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Businesses that manufacture products for onward supply have legal responsibilities to the end users of those products and to other entities in the supply chain.
Understanding those responsibilities allows a manufacturing business to mitigate its exposure to civil (and potentially criminal) liability, as well as minimising the risks of reputationally-damaging product recalls or high-profile claims.
This article summarises some key aspects of the product liability regime before considering how appropriate provisions in contracts between manufacturers and their supply chain partners can help to manage the risks associated with product liability claims.
Product liability: summary of key aspects of the regime
Statutory liability for defective products: The Consumer Protection Act 1987 (the CPA) is the principal UK legislation governing liability for defective products.
The CPA, and the case law that has developed around it, determine key issues such as:
- What factors are relevant to establishing that a product has a 'defect', i.e. how do you decide whether 'the safety of the product is not such as persons generally are entitled to expect';
- What types of liability can arise in respect of defective products, covering civil liability (and the obligation to pay damages) for death, personal injury or damage to property caused by defective products, as well as criminal liability for failure to comply with consumer safety requirements;
- Which entities in the supply chain can incur liability, covering the original manufacturer of a manufactured product, any entity that 'own-brands' the product (by supplying it under the own-brander's own name or trade mark), and any entity that has imported the product into the UK – any of which can be held liable on a 'primary' basis – but also potentially covering any other entity in the supply chain that receives a claim and is unable to identify to the claimant one of the entities with primary liability within a reasonable period of time; and
- What defences are available in response to a product liability claim, including, for example, the defence that the defect did not exist in the product at the time of supply.
Other bases for a claim in respect of defective products: Alongside the statutory regime governed by the CPA in respect of defective products, manufacturers could also incur liability in respect of products they have manufactured as a result of a common law claim in negligence – which would be based on the argument that the manufacturer had failed to satisfy a duty of care to the user of the product – or a claim for breach of contract brought by the buyer of the product.
The statutory liability for breaches of product safety requirements: A separate statutory regime in respect of product safety, governed by the General Products Safety Regulations 2005 (the GPSR) in the UK, runs alongside the CPA regime in respect of defective and unsafe products.
The GPSR creates a range of criminal offences for supplying consumer products which fail to meet the statutory definition of being 'safe' and for a range of other breaches in respect of consumer safety.
Many categories of products (drugs and medical devices, food, electrical equipment, toys etc.) are subject to their own specific regulatory safety regimes, which apply in place for the GPSR, save to the extent that the requirements of the GPSR go beyond the requirements of the product-specific regime.
Using contracts to manage product liability risks
Since product liability risks are a consideration for all of the entities involved in the product supply chain, it is important for any business entering into a commercial contract relating to the manufacture or supply of products to ensure that the contract provisions on this issue provide for an acceptable allocation of risk and exposure.
Key issues to bear in mind from the outset when considering such arrangements include:
- Product warranties – in any manufacturing contract, the manufacturer will have an interest in limiting the warranties it provides in respect of the product (or, where it provides more extensive warranties, ensuring that it prices the product accordingly and is confident that the warranties will be satisfied), whereas the customer will seek to ensure that the contractual warranties are sufficiently robust;
- Caps and exclusions of liability – the manufacturer of a product is likely to seek to control its exposure to claims from its customer using contractual caps and exclusions of liability. These provisions should be carefully drafted/reviewed since a range of legal considerations are relevant to deciding whether they will be effective if a party seeks to rely on them in response to a claim, including those set out in the Unfair Contract Terms Act 1977;
- Indemnities – since product liability claims can be brought by the end user of the product against one or more of a range of entities involved in the supply chain, indemnities in the contracts between the different supply chain participants can be used to ensure that liability for such claims rests with the entity responsible for the relevant defect. For example, the distributor of a product may wish to obtain an indemnity from the manufacturer to ensure that, should the distributor suffer a product liability claim as a result of a defect arising from the manufacturing process, it can back that liability off in full against the manufacturer. The manufacturer may want to negotiate any such indemnity to ensure that it covers only those matters giving rise to the defect for which the manufacturer is itself responsible;
- Insurance – a customer is likely to seek assurance from the manufacturer of a product that the manufacturer holds appropriate product liability and public liability insurance policies to cover its potential liability to the customer (including, for example, liability under any indemnities which the customer has been able to negotiate). At the same time, any party committing to hold specified types or levels of insurance in a contract will need to ensure that the commitments it gives in the contract are covered by the policies it holds;
- Product recall – it is prudent for parties to a manufacturing contract to consider their respective roles and responsibilities (including any responsibilities undertaken in respect of third parties) in the event that a product recall becomes necessary as a result of a serious consumer safety issue.
The contractual measures discussed above can be used to mitigate product liability risks (and allocate those risks between the parties), complementing other measures used by manufacturers to control exposure, such as the use of insurance and, of course, the implementation of operational quality assurance measures to ensure that defects do not occur in the manufacturing process, and are swiftly identified and managed if they do.