BUSE4024A 2023 Liability for Defective Products PDF

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris Lecture 7 LIABILITY FOR DEFECTIVE PRODUCTS- STATUTORY AND INSURANCE ISSUES The Scope of Cover under P...

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris Lecture 7 LIABILITY FOR DEFECTIVE PRODUCTS- STATUTORY AND INSURANCE ISSUES The Scope of Cover under Products Liability Insurance Products liability insurance provides protection against claims arising from 3 types of wrongful acts associated with the manufacture or distribution of products namely: (a) Defective manufacture of the product; (b) Defective design of the product; and (c) Inadequate instructions or warnings. At face value, the above framework looks simple and straight forward, but the reality is that products liability has given rise to complex litigation worldwide. The two most common causes of action used to recover damages for defective products are strict liability and negligence. In most jurisdictions including the US manufacturing defects usually attract strict liability in most jurisdictions while design defects and inadequate instructions are usually disposed of by applying the negligence criteria (Warshauer & Plunkett, 1994). Defective manufacture, defective design, and inadequate instructions constitute what is called ‘the defect’ in a product. Collectively these three forms of defect can give rise to a wide range of potential losses. The production, supply and circulation of products can result in the following potential losses: (a) Death, illness or bodily injury caused by a defective product; (b) Physical damage to property caused by a defective product; (c) Financial loss sustained by a customer or 3rd party in conjunction with (a) and (b) above e.g. loss of earnings following personal injury or loss of profits following damage to the claimant’s property; (d) A legal obligation to replace or repair a product or work which is defective or fails to perform its intended function; (e) Damage or injury (with or without financial loss) sustained by a customer or 3rd party as a result of a product’s failure to perform its intended function e.g. a pesticide burning the crop of a farmer crop after being sprayed causing reduced yield. (f) Pure financial (economic) loss as a result of a product’s failure to perform its intended function e.g. a seed variety which fails to develop at maturity leading to low or no harvest. (g) Costs associated with the recall of products where defects are known or feared to be present e.g. a car manufacturer having to recall an entire model after it is discovered that its brakes are faulty. 1 Not all these losses fall under products liability insurance. Typically, a products liability insurance contract seeks to do two fundamental things namely: (1) It undertakes to indemnify the insured of the sums he shall become legally liable to pay as damages because of bodily injury, death or property damage caused by a defective product; and (2) It undertakes to defend the insured in any suit against him/her seeking damages on account of such bodily injury, death or property damage. The duty to defend arises even if some of the allegations against the insured are groundless or false. Ordinarily a products liability insurance contract will cover liability for loss types (a), (b) and (c) only. Liability for loss type (d) i.e. costs for replacing or repairing a faulty product is regarded as a ‘trade risk’ which may be insurable to a limited degree if at all. An insurer who agrees to assume this risk is effectively guaranteeing the general business competence of the insured in addition to protecting him from losses that are accidental in origin. Not many insurers are prepared to do this. Loss type (e) is ‘inefficacy risk’. It refers to damage caused by the product to perform its intended function as opposed to a mere financial loss arising from the product’s failure to perform as expected i.e. loss type (f). Some insurers exclude the inefficacy risk for some types of products but it could be argued that such risk ought not to be excluded since product liability claims invariably arise from the failure of a product to fulfill its intended function. A limited market exists for loss-type (f) - liability for pure economic loss arising from a product that fails to perform its intended function without physical damage. An example of this is a sound system supplied by the insured may fail leading to the cancellation of a concert causing a large claim for lost revenue; or a seed variety that does not mature resulting in no yield at all. Loss type (g) is ‘product recall’ and can be substantial depending on the product recalled. For mass circulating products, a recall can be quite a daunting task both in logistical and financial terms. The aftereffects can also be very uncertain. In 1985, there was an outbreak of salmonella in Britain. This led to the contamination of ‘Ostermilk’ a baby food that was produced and marketed in Britain by Farley Health Products. The resulting product recall loss was around £4m. Farley only resumed production of this product in February 1986 but did not survive. It was taken over by Boots. In the 1980s Audi’s car sales dropped by 69% after reports of problems of sudden acceleration of its vehicles (Polinsky & Shavell, 2010). In 1989, the spring from which a British water bottling company called Perrier drew its water was contaminated by naturally occurring benzene. A total of 160m bottles of water were recalled and the total cost of the recall and re-launch operation was estimated at £130m. Still in the 1980s the American firm Johnson and Johnson incurred a large loss of around $150m when some packs of its pain-relieving drug ‘Tylenol’ were found to have been deliberately tainted with cyanide on two occasions. Eight people died in both incidents and Johnson and Johnson’s market share fell from 35% to 5% (Polinsky & Shavell, 2010). *Follow this link for product recalls in South Africa by the South African Health Products Association - https://www.sahpra.org.za/product-recalls/ 2 * https://www.news24.com/news24/bi-archive/product-recalls-in-south-africa-in-20222022-9 Aside note: According to risk specialist and insurer Santam’s subsidiary SHA, there has been a significant uptick in the number of claims related to both the cost and legal implications of product recalls since 2018, when Tiger Brands' listeriosis scandal rocked the nation. Although product recalls are often associated with the food production sector, there has been an upward trend among automotive and technology brands, such as the recall of cars by Mercedes-Benz South Africa, Manisha Chiman, SHA’s head of Professional Indemnity and Liability Underwriting said. One of the reasons for the rising claims results from South African businesses changing suppliers over the past two years, which also indicates the impact Covid19 had on suppliers, Chiman said. Over the period, product liability claims for SHA skyrocketed from R2.7 million to R8.8 million, she said. “The 2022 SHA Specialist Risk Review reveals that just under half of South African businesses have changed suppliers over the past 24 months, with 30% of these businesses doing so due to cost and 25% were forced to make the switch due to a supplier closing down,” Chiman said. Products Liability Insurance A good starting point in the discussion on products liability insurance is to consider what constitutes a product for purposes of insurance coverage. Like most other terms we encounter on a daily basis, everyone knows what a product is until they are asked to define it. The word lends itself to many different meanings depending on the context it is used. It can be used to refer to people e.g. Alex is a product of Wits University or John is a product of the Arsenal Youth Academy. For purposes of product liability insurance, case law provides some useful insights and guidelines on what a product is and how it should be conceptualised. In the English law case of Aspen Insurance Co UK v Adana Construction Co Ltd [2015] EWCA 176 the court emphasized that the word ‘product’ should be interpreted in its conventional and natural sense. The court went further say that ‘product’ denotes something that in its original sense is tangible and movable. It must also be transferable from one person to another. Therefore, in terms of this guideline pressure put into a tyre of a motor vehicle at a service station cannot be a product because it is 3 neither tangible nor transferable from one person to another. Like any other liability insurance contract, products liability insurance seeks to do 2 key things: § Indemnifying the insured product producer for claims it becomes legally liable to pay as damages arising from the supply of a defective product; and § Defending the insured against allegations of liability or any lawsuit seeking damages relating to the supply of a defective product. Damages contemplated in the coverage must relate to bodily injury, death, sickness or property damage directly caused by a defective product. Cover can be arranged on claims made or occurrence basis. In the US, most rules governing liability for defective products evolved from asbestos litigation dating back to the 1970s. When insurance coverage is on claims made basis, the making of the claim by the injured consumer against the insured determines which insurance policy should respond to the claim. The insurance in place when the claim is made is liable for the claim. By contrast, if coverage is on occurrence basis, the insurance policy in place when the underlying harm or injury to the consumer occurs is liable for the claim. Products liability policies usually respond to an ‘occurrence’ as defined in the policy. This can be defined to mean ‘an accident……..which results in bodily injury, death or property damage neither expected nor intended from the standpoint of the insured’. It is also possible for cover to be provided on claims made basis. The term ‘occurrence’ when used in a liability policy gives rise to the crucial issues of the timing of the occurrence and how long an occurrence should be in terms of duration e.g. in the case of a pharmaceutical company that markets a drug over a long period of time which is subsequently found to be defective. The question in such cases if an occurrence wording is used would be-How should the occurrence be defined? What constitutes an occurrence determines how many times the policy limit and the insured’s deductible should apply in any given situation. Products liability insurance policy limits are applied to each occurrence. How an occurrence is defined in the policy has implications on how policy limits and deductibles are applied. Most jurisdictions use the principle that the number of occurrences for purposes of products liability coverage is determined by the cause of the underlying damage not the number of injuries or claims. The number of occurrences determines the number of times policy limits and deductibles on a triggered policy will apply to pay a loss. 4 For example in the US case of Owens-Illinois Inc v Aetna Casualty & Surety Co [1984] Owens-Illinois had manufactured and sold products containing asbestos for a number of years. Thousands of bodily injury claimants filed claims alleging exposure to its asbestos products. Relying on the large ‘per-occurrence’ deductible in its policies Aetna Insurance Company argued that the deductible should be applied separately to each underlying lawsuit. On the other hand, Owens-Illinois argued that its production and sale of asbestos-containing products constituted a single occurrence under the policy. The court rejected Aetna Insurance’s interpretation of ‘occurrence’ and held that all claims alleging exposure to asbestos-containing products were one occurrence. Hence, what constitutes an occurrence depends on the cause of damage and not the number of victims. When insurance coverage is on claims made basis, the making of the claim by the injured consumer against the insured determines which insurance policy should respond to the claim. The insurance in place when the claim is made is liable for the claim. By contrast, if coverage is on occurrence basis, the insurance policy in place when the underlying harm or injury to the consumer occurs is liable for the claim. Consider a company that manufactures a defective product over many years before the defect is discovered. The company is eventually sued by 10 000 people who allege to have been injured by the product. If the manufacturing company has products liability insurance which pays on a per occurrence basis, the question is how many occurrences do we have in this case – one or 10 000? If we have 10 000 occurrences it means the policy limit and deductible must apply to each of the 10 000 occurrences. A logical way to deal with this situation is to look at the underlying cause. If the cause is one uninterrupted act, then it constitutes one occurrence regardless of the number of people injured. In the US this approach is called the ‘cause test’ of determining occurrence. The 11 September 2001 terror attacks in New York illustrate the above point equally well. In that event terrorists hijacked 4 passenger jets. American Airlines Flight 11 crashed into the North Tower of the World Trade Centre. United Airlines Flight 175 crashed into the South Tower and American Airlines Flight 77 hit the Pentagon. The question is- are these crashes one occurrence or three occurrences? From an insurer’s perspective, what option would be preferable – to have the crashes treated 5 as three separate occurrences or one occurrence assuming that all properties that were hit were insured by the same insurer? Most products liability policies may contain exclusions largely similar to those seen in public liability policies. In addition, the policies also exclude product recall, product guarantee and financial loss covers. In the previous lecture we saw the different claim types that can arise from the supply of a defective product. This begs the question – which of those claim types are covered by products liability insurance? Although the answer to this question varies depending on how developed a particular insurance market is, most products liability insurers are prepared to cover claim types 1-3 namely: § Bodily injury, death or illness caused by a defective product § Damage to property § Consequential losses directly flowing from physical harm caused by a defective product Coverage of claims beyond these 3 depends on how sophisticated the market is. Even among the sophisticated markets there are wide variations. For example, most insurers in developed markets do not cover claim type 5 or inefficacy risk which is loss to a customer due to the product’s failure to perform its intended function. Providing coverage to this claim type equates to the insurer guaranteeing the technical and professional competence of the insured. Similarly, most insurers are not prepared to extend coverage to loss arising from product recall. As we pointed out in the previous lecture (a), product recall claims can be very costly. From discussions on product recall, you will understand why most insurers are unwilling to cover these claims. Products liability policies issued by most insurers in developing markets including South Africa usually contain the so-called North America exclusion. In terms of this exclusion, liability for claims arising from products exported to North America (mainly the US and Canada). Most product liability policies provide the insured with defence cover also known as the duty to defend. The duty is triggered by the making of allegations of liability against the insured by a customer or member of the public. As long as the allegations raise the possibility of a claim falling within the existing coverage, the duty to defend is triggered. The insurer controls the defence of its insured. Under normal circumstances most large producers of products want to export to other countries. This raises a potential problem for insurers related to the duty to defend. This is the prospect of having to be required to defend the insured sued in a foreign jurisdiction. Most insurers are not keen on this. Consequently, products liability policies can address this concern in one of two ways, namely: § Inserting the Applicable Law Clause in the policy. This clause may state that the insurer’s obligation to defend the insured is only applicable where the 6 § lawsuit in question is brought in terms of Roman Dutch law. Therefore, if the insured is sued in America where the court will apply American law the insurer is not obligated to defend the insured. Inserting a Jurisdiction Clause in the policy. Typically, this clause restricts the insurer’s liability to claims arising from specific jurisdictions stated in the policy. By implication, the duty to defend will only arise if the claim is brought in the jurisdictions specified. Judgements awarded by foreign courts also raise other complex issues when it comes to enforcing them. Applicable Law Often firms that require products liability insurance export their products to other countries. This makes it necessary for products liability policies to clarify which law would be applicable in the event of a claim. Jurisdiction clauses are used in this regard. Where a producer of a defective product and the claimant are domiciled in different countries the question of which law should apply often arises. In Europe, the Lugano Convention of 1988 as subsequently amended provides that the plaintiff has freedom of choice to sue the manufacturer either in his country or in the country where the product caused damage. This convention was issued under the auspices of the European Union and hence applies to EU member states only. Many insurers in South Africa exclude liability arising from products exported to the United States and Canada because the risk involve in covering product liabilities from these jurisdictions is rightly or wrongly perceived to be too high. This perception arises from the following features which are characteristic of US and Canadian jurisdictions: highly litigious societies; generally pro-consumer laws; contingent fee arrangements; consumerism; and increasing use of strict liability. However as far as strict liability is concerned it must be said that most jurisdictions across the world have extended strict liability in the field of liability for defective products. Explaining the North America Exclusion in Products Liability Policies Products liability policies used in developing and some emerging markets contain the North American exclusion. The question here is, what is the rationale for this exclusion? Several reasons have been offered to justify the necessity for this exclusion. Virtually all the reasons cited arise from structural features of American and Canadian legal systems that create the perception that they are risky jurisdictions. Therefore, issues discussed in this section must be understood in the context of what has been covered about factors that influence liability risk outcomes. Some of them are not as valid as they are made to be. That notwithstanding, some of the main reason used to justify the North America exclusion in products liability policies are: § Use of the contingent fee system. This system was introduced in the US legal system to improve access to the courts by plaintiffs. In terms of the system, lawyers accept cases without the plaintiff being asked to pay a retainer (deposit) 7 § § § as is the norm with the understanding that if the case is won the lawyers take a specified percentage of the damages awarded (typically 30-40%) as fees. The system creates two problems that adversely affect insurers. Firstly, the contingent fee system creates an incentive to sue which increases the frequency of potential claims. Secondly, in creates incentives for lawyers to inflate claims in order for them to boost their earnings. However, recent evidence shows that even with this system, most Americans are finding it harder to file claims in the courts (Rakoff, 2016). Hence the fear of this system could be exaggerated. Prevalent use of strict liability. Another reason used to justify the North America exclusion is that there is prevalent use of strict liability. Strict liability originated from US courts that introduced the doctrine to deal with asbestos claims. Courts held that any product containing asbestos was strictly defective. However, using fear of strict liability to justify the North America exclusion is flawed logic for two reasons. Firstly, virtually all countries have or are moving towards use of strict liability in the area of defective products under the consumer protection movement. Secondly, since the 1990s, most US states have introduced reforms to curtail use of strict liability (Barnes, 2007). Prevalent use of punitive damages. This is perhaps the most cited reason for the North American exclusion. Punitive damages in a liability insurance context inflate the magnitude of claims. However, use of punitive damages in the US is not as widespread today as it is made out to be again thanks to the tort reforms adopted by many states in recent years. Their use is even less prevalent in the area of liability for defective products where they originated. Forum shopping. Forum shopping is a practice where lawyers file claims in a different jurisdiction from the one where the cause of action arose. The practice is supported by lawyers who argue that it is a way of maximizing advantages to the plaintiff. A 2005 study by the US Chamber of Commerce lists states considered to be pro-plaintiff implying that these are the states one does not want to be sued. They include Illinois, West Virginia, Florida among others. However, some studies have found that forum shopping has benefited lawyers more than it has plaintiffs (Swiss Re, 2001). Rightly or wrongly, the above are some of the main reasons cited for including the North America exclusion in products liability policies. Products Liability in the EU The Product Liability Directive 85/374/EEC is a directive of the Council of the European Communities (now the European Union) which created a regime of strict liability for defective products applicable in all member states of the European Union, the other EEA members (Iceland, Liechtenstein and Norway) and the United Kingdom. 8 It is widely accepted that the 1985 Directive imposes strict liability (liability without fault) on producers in cases of damage caused by a defective product. If more than one person is liable for the same damage, such liability shall be joint and several. Under the Directive producer is taken to mean any of the following parties-any participant in the production process; the importer of the defective product; any person who branded the product; and any person supplying a product whose producer cannot be identified. To succeed, a claimant must prove: (1) actionable damage; (2) existence of a defect; and (3) a causal link between the defect and the damage. Defences The Directive avails a number of defences to producers which if successfully pleaded exempt them from liability. These are: • • • • • • • • That he did not put the product into circulation; Contributory negligence; That the defect causing the damage came into being after the product was put into circulation by him; That the product was not manufactured for profit-making sale; That the product was neither manufactured nor distributed in the course of his business; That the defect is due to compliance of the product with mandatory regulations issued by the public authorities; That the state of scientific and technical knowledge at the time when the product was put into circulation was not such as to enable the defect to be discovered i.e. state of the art or development risk defence; and In the case of a manufacturer of a component of the final product, that the defect is attributable to the design of the product or to the instructions given by the product manufacturer. Scope of the Directive For purposes of the Directive, ‘damage’ means death or personal injury and damage to an item of property intended for private use or consumption other than the defective product. The Directive does not apply to injury or damage arising from nuclear accidents covered by international conventions ratified by Member states. Prescription under the Directive is three years and this period starts to run from the date the claimant became aware of the damage, the defect and the identity of the producer. The producer’s liability expires after ten years from the date on which he put the product into circulation. Member states are allowed under the Directive to set total limits of liability for producers for death or personal injury caused by identical items with the same defect. After the ‘mad cow’ crisis the 1985 Directive was extended in scope by Directive 1999/34/EC to include primary agricultural products such as meat, cereals, fruit and vegetables. 9 The Directive is restricted to ‘products’ and does not cover services. Additionally it applies to products put into circulation in the course of business. Damage to commercial property is not covered nor is pure economic loss suffered due to acquisition of a defective product. Unlike in the US liability under the Directive is ‘channeled’ hence it attaches primarily to three parties-the producer, the importer into the EU, and brand producer. Mere suppliers such as wholesalers and retailers face secondary liability which they can avoid by naming one of the primarily liable parties (Stapleton, 1999). Pleading the state of the art defence is difficult in practice because even where it may appear that the defence is competent, it may still fail. In A v National Blood Authority [2001] 3 ALL ER 289 a total of 117 claimants brought an action for damages under the Consumer Protection Act 1987 arising from their infection with hepatitis C as a result of blood transfusions received after March 1988. The claimants argued that they received infected blood between 1988 and 1991. They claimed that the infected blood was a defective product within the meaning of the Act. The Blood Transfusion Authority argued that since there was no test for screening hepatitis C in the UK until April 1991, the virus’s presence in the blood was impossible to detect. This argument was rejected by the court which found in favour of the claimants in a ruling many considered harsh. The court held that the blood was defective within the meaning of Section 6 of the Act because the public at large was entitled to expect that blood given to them in transfusions was free from infection. The development risk (or state of the art) defence failed because the blood authority knew of the possible risk of infection. The judge stated that it was irrelevant that the authority could have done nothing to screen the blood or could not have taken any steps to prevent claimants from being infected. The mere fact that the authority knew of the risk of infection was enough to render the development risk inapplicable. Products Liability in South Africa Liability for defective products in contemporary South Africa is a field which largely falls under the purview of the Consumer Protection Act 68 of 2008. The Act imposes a wide range of obligations on suppliers and related entities aimed at protecting consumers. In terms of scope, the Act applies to every transaction occurring with South Africa for the supply of goods and services as well as the promotion of such goods and services. Prior to enactment of this Act liability of manufacturers for defective products was founded in either contract or delict. In the case of Wagenar & Cuttings v Pharmacare Ltd 2003 (4) SA 285 (SCA) a defective anaesthetic was used during a shoulder operation which left the patient with paralysis of the right arm and necrosis of the tissue and nerves. The Supreme Court of Appeal affirmed the fault requirement by refusing to recognise strict liability for defective products. The court observed that if strict liability were to be imposed in this area it is the duty of the legislature to do so. Strict liability now exist by virtue of Section 61 of the CPA. The section provides that a producer or importer, distributor or retailer of goods is liable for harm caused by the supply of unsafe goods; a product failure, defect or hazard in the 10 product; or by insufficient instructions or warnings to consumers about any hazard associated with use of the product supplied. Under Section 61 of the CPA negligence is not a requirement for purposes of establishing liability of the producer, importer, distributor or retailer. In terms of Section 63(3) joint and several liability applies to all parties who may be liable in terms of Section 61. The types of harm for which liability may attach in terms of Section 61 include-death or injury of natural person, illness, loss of or physical damage to any property, and any economic loss that may result from the aforesaid harm or damage e.g. business interruption or loss of earnings. Reflection Question. Outline the problems that the principle of joint and several liability creates for liability insurers. In Section 61(4), the CPA provides a number of defences which can be pleaded against liability for damage caused by defective products. These are: (1) That the defect, unsafe characteristic or failure of the product was due to compliance with a public regulation; (2) That the defect, unsafe characteristic or hazard on the product did not exist at the time the product was supplied ; (3) That the harm caused by the product was due to improper use of the product by the consumer or was due to his/her failure to adhere to the instructions issued; (4) That it is unreasonable to expect the distributor or retailer to have detected the unsafe product characteristic or defect given their role in marketing the goods to consumers; and (5) Prescription. Under the CPA, the prescription period is 3 years. Interestingly the CPA does not provide for contributory negligence by the consumer as a defence. Another defence seen in consumer protection legislation of other countries is the state of the art defence. The defence exonerates a manufacturer or producer from liability if it is able to convince the court that given the level of technical and scientific knowledge available at the time the product was made, it was impossible for the defect to be identified. In practice, this is a very difficult defence to plead successfully. Further, suppliers cannot contract out of the liability regime set by the CPA under Section 61. The CPA is an extensive piece of legislation but most of its provisions are still to be tested in the courts. Under the Act, damages may be awarded against the offending party and this is so even in cases where there is a class of consumers who were prejudiced by the offending party’s conduct. 11 ‘The Consumer Protection Act changes the playing field in the sphere of product liability. Plaintiffs under the previous common-law system sought assistance from the law of delict and were required to conquer often insurmountable challenges. Under the Consumer Protection Act consumers are able to claim damages under section 61. At first glance the Consumer Protection Act appears to impose strict liability and broaden the scope of liability to be imposed in product liability cases. However, a closer analysis of the European product liability system shows that the same tests have not had the desired effect in that area, which raises the question as to whether section 61 will ultimately benefit consumers in South Africa. Despite some apparently vague and problematic tests finding their way into the South African Consumer Protection Act, our statute is unique in that it instructs courts, in all instances, to adopt a purposive method of interpretation. This provision may be the ultimate saviour in preventing South Africa from following foreign interpretations and allowing fault back into product liability cases. In order to place the consumer in the best position possible, our courts will need to interpret section 61 in such a way as to impose liability without fault, without allowing any remnants of the old system back in. One can only hope that our courts will heed to this purposive method of interpretation and protect consumers to the fullest extent’. ( Product Liability: A Changing Playing Field? Christin Gowar LLB Lecturer, School of Law University of the Witwatersrand, Johannesburg) Products Liability Risk Assessment § § § § § Nature of the product, its use and target market. Products that quickly such as food products have a much wider market and hence have potential to harm many people over a short period. Instructions that accompany the product when it gets onto the marketplace. To the extent that inadequate instructions are a dimension of defect in a product, they constitute an important risk assessment factor. Position of the insured in the product value chain. The insured could be a manufacturer, retailer, wholesaler, marketer, distributor or designer. Although risk converges on the manufacturer, liability rules in most countries allow any of the parties in the product value chain to be sued if the product turns out to be defective. These other parties could have recourse against the manufacturer but the obligation to compensate the injured consumer rests equally with any of them. Product history and reputation of the insured as producer. A good reputation of the manufacturer is a good signal for professional standards and good quality control. However, this is not to say things cannot go wrong in blue chip corporations. System of quality control that the product undergoes before it lands on the market. Some products are tested and certified by independent 12 § § § bodies before they reach the market while for others quality control takes place in house. Terms and conditions on which the product is sold to consumers. Some contractual guarantees that are extended to customers when the product is sold may increase risk in the event of the product turning out to be defective. Whether the product is exported and if so where to. Some jurisdictions are considered risky because of certain features of their legal systems. Turnover of the insured product. Turnover is a good indicator of determining the volume or quantity of the product that gets into the market on an annual basis. Risk Management Issues in Liability for Defective Products As pointed out previously, globalisation of industry means that materials and components used in the manufacture of products may be sourced from multiple countries and suppliers. In such a setup, it may be difficult to enforce contractual rights when things go wrong. The manufacturer and distributor may be based in different countries. A defective product may attract fines and penalties from regulatory authorities in various countries where the product is marketed and sold. If the defect arose from a component used in the manufacture of the product, who should be responsible for the fines and penalties – the supplier of the defective component or the manufacturer of the product as a whole? There is also the risk of class actions by consumers. From this, a number of risk management issues/questions must receive attention. § Product design – how is the product designed and by who? § Product testing – how is this done and by who? Is the testing done by an independent body or it is an internal process? § Product certification – is this mandatory and if so who is responsible for this? § Protocol to be followed in the event of discovery of a defect – is there a protocol that must be followed if a product that has already reached the market is later found to be defective? Is mandatory notification of authorities required? A defective product can trigger other risks for the responsible manufacturer as well. One such risk is reputational damage. More often than not, how the manufacturer handles the issues arising from discovery of the defect determines the level of reputational damage it suffers. POSTSCRIPT ON PRODUCT RECALL: Product recalls in South Africa Product recalls in South Africa and globally have attracted much attention recently. In 2021, Phillips issued a global voluntary recall in respect of certain of its sleep apnoea 13 machines. The machines include a foam component that, when broken down, has the propensity to cause harm to consumers using the machines, including cancer and respiratory problems. By August 2022, Philips was almost halfway through its recall of 5.5 million machines in the United States. This recall has significantly diminished Philips’ market share by an estimated $30 billion (see T Sterling et al in “FDA says faulty Philips device reports accelerating as CEO departs” in Reuters (17 August 2022). Another recall that received significant attention earlier this year, was the voluntary recall of certain batches of infant formulas produced by Abbott Laboratories-Nutrition. The recall arose due to possible bacterial contamination at one of the production sites in the United States. This recall affected consumers in more than 50 countries, including South Africa. Locally, the National Consumer Commission (“the NCC”), which is the regulatory body responsible for consumer matters in South Africa, released a media statement on 22 February 2022 urging South African consumers to return the affected formula to points of sale for a full refund. As the above examples show, product recalls inevitably involve serious issues, including consumer welfare and manufacturer reputation and liability. It is therefore important for manufacturers, consumers and all the stakeholders between them (including suppliers and distributors) to take note of their legal rights and obligations in respect of product recall in South Africa. The focus of this article is product recalls under the Consumer Protection Act No. 68 of 2008 (“the CPA”). Legal framework Recalls are regulated in South Africa primarily by the CPA. The CPA applies generally to goods supplied to consumers. Goods are, in turn, broadly defined in the CPA as including anything marketed for human consumption or any other tangible product. Although not the focus of this article, the recall of certain specific products is regulated more directly in sector-specific legislation. In these circumstances, the product recall requirements of specific legislation, will in the main, take precedence over the requirements of the CPA (being the legislation of general application). For example, the recall of medicines, medical devices (which would include sleep apnoea machines) and in vitro diagnostic medical devices is specifically regulated under the Medicines and Related Substances Act No. 101 of 1965. Recalls, harm and liability In general, the CPA allows for two categories of recalls, namely voluntary and mandatory. Voluntary recalls are undertaken by suppliers who have proactively identified a risk of potential harm posed to consumers by the suppliers’ products and who wish to manage that risk (and the supplier’s potential liability to consumers) by recalling those products. 14 Mandatory recalls, on the other hand, are recalls which are required by the NCC where reasonable grounds exist to believe that any particular goods may be unsafe, or that there is a potential risk to the public from the continued use of or exposure to the goods (section 60(2) of the CPA). In practice, however, most recalls are voluntarily initiated, given that the supplier has intimate knowledge of its product and the consumer market that uses those products. In this regard, voluntary recalls are based on the proactive management of a supplier’s potential risk and liability. In this regard, section 61 of the CPA creates strict liability for producers, importers, distributors and retailers of goods where harm is caused by goods that are “unsafe”, suffer from a “product failure, defect or hazard” or where goods were not accompanied by appropriate instructions or warnings. Definitions for the aforementioned terms appear in the CPA as follows – • “defect” is defined as – “(i) any material imperfection in the manufacture of the goods or components, or in performance of the services, that renders the goods or results of the service less acceptable than persons generally would be reasonably entitled to expect in the circumstances; or (ii) any characteristic of the goods or components that renders the goods or components less useful, practicable or safe than persons generally would be reasonably entitled to expect in the circumstances”; • • “failure” is defined as “the inability of the goods to perform in the intended manner or to the intended effect”; “hazard” is defined as “a characteristic that – “(i) has been intended as, or declared to be, a hazard in terms of any other law; (ii) presents a significant risk of personal injury to any person, or damage to property, when the goods are utilised”; and • “unsafe” means “that, due to a characteristic, failure, defect or hazard, particular goods present an extreme risk of personal injury or property damage to the consumer or to other persons”. The specific types or categories of harm for which a supplier may be held liable pursuant to section 61 of the CPA, include, according to section 61(5) – • • the death of, or injury to, any natural person; an illness of any natural person; 15 • • any loss of, or physical damage to, any property, irrespective of whether it is movable or immovable; and any economic loss that results from harm referred to above. The provisions of section 61 of the CPA are, therefore, very broad in nature and are intended to afford consumers as much protection as possible in respect of circumstances where harm has been caused by the use of certain goods. Voluntary product recall Guidance on the voluntary recall process has been published by the NCC in terms of the CPA under GN490 in GG 35434 on 13 June 2012 (“the Guidelines”). A summary of the procedural requirements which a supplier must follow pursuant to a voluntary product recall is set out below – • Conduct a risk analysis of the safety hazard According to the Guidelines, once a supplier becomes aware of a “possible safety hazard” in a product that may cause injury, the supplier is required to gather and assess all available information about the potential hazard, identify how the problem occurred and conduct a comprehensive risk analysis. • Cease production or modify the manufacturing process for the product that has been identified for recall A supplier must then stop the production of a product that is subject to recall, alternatively, modify the manufacturing process to remove the hazard. • Notify the relevant regulator/s and relevant parties In terms of the Guidelines, suppliers are required to notify the NCC and other suppliers in the supply chain, including international suppliers, that the recall has been has initiated. According to the Guidelines, the supplier must notify the NCC of the recall, in writing and in terms of a prescribed form, preferably before commencing the recall action, alternatively, within two days after commencing the recall action. • Determine a course of action The Guidelines specify that a supplier must decide on the most appropriate course of action in order to reduce the risk of harm to consumers taking into account the nature of the risk, the distribution and lifecycle of a defective product. The supplier is also obliged to consult with the NCC about the most appropriate strategy for the recall. • Preparing a written recall strategy/plan 16 A supplier must submit a recall strategy to the NCC initiating a recall to assure the NCC that any product safety risk will be effectively mitigated. The recall strategy must contain specific information, including an explanation of the problem, the number of products affected, the hazards associated with the product and the supplier’s assessment of the risk posed by the product. • Communication plan for consumers In addition to the requirement of the submission of a recall strategy, the Guidelines require a supplier to compile a communication plan and recall notice for its consumers which must be “directed towards the particular consumer demographic for the recalled product, using an appropriate communication method”. The recall notice must include a clear description of the product and the defect (including a photograph of the product). The communication must also include a section entitled “What To Do”, which explains the immediate action the consumer is to take, for example, cease use immediately and return the product to the place of purchase for a full refund. It should be clear that the consumer should return the product and not dispose of the product. The supplier must also minimise any inconvenience to consumers and encourage consumers to comply with the recall notice. Finally, the communication must include the relevant contact details for the persons responsible for the recall. • Arrangements for the retrieval The Guidelines prescribe that suppliers must make arrangements for the actual retrieval of the recalled product. • Reporting obligations Finally, significant reporting requirements are also prescribed in the Guidelines for suppliers who undertake the recall process. In particular, the Guidelines provide that “[i]n order to monitor the progress and enable ongoing assessment of the effectiveness of the recall the [NCC] requires a supplier to provide progress reports”. The NCC will also develop a reporting schedule with a supplier at the beginning of a recall that appropriately reflects the product risk being addressed. The information that the NCC will require as part of any progress reports will be dependent on the circumstances of the recall and therefore will be negotiated on a case-by-case basis. Information that may be required by the NCC in terms of the progress reports includes the number of products returned from within the supply chain and those from consumers. 17 Conclusion Ultimately, therefore, whilst the NCC may elect to pursue mandatory product recalls in certain instances, the publication by the NCC of the Guidelines has emphasised, firstly, the responsibility that suppliers bear in being proactive in monitoring and ensuring the continued safety of products sold to consumers and secondly, the need for suppliers to take sufficient and expeditious voluntary steps to mitigate any safety concerns apprehended in respect of those defective products. Dr AM Mushai Ms P Spemtzouris (Reviewed April 2023) 18