Product Liability – Considerations for Manufacturers

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.

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.