The current challenges of product
liability and product recalls
Last updated: 22 June 2021
Introduction
Product–related risks are one of the greatest perils that businesses face today.
Defective products not only pose a serious safety risk to the public, but can also
cause significant financial and reputational damage to the companies
concerned.
Product recalls are increasing in size and number, predominantly driven by the
increasing complexity of global supply chains and the concentration of certain
components or ingredients in the hands of a smaller number of suppliers, as
well as tougher regulation.
While the discovery of defects in products is quite common, their consequences
can be very significant. There are two substantive threats when it comes to
potentially unsafe goods: product liability claims and product recalls.
The term “product recall” generally refers to the situation where manufacturers
attempt to recall products that are already on the market or have been sold to
the end customer. The reason for the recall is either a lack of authorization (e.g.,
certifications or licenses when using patents) or defects in the product.
Product liability, on the other hand, is a legal instrument by which manufacturers
are made responsible for damage caused by defective products. In this context,
product liability is a collective term for all circumstances in which a defective
product causes personal injury or property damage, for which the manufacturer
responsible for the product is liable under legal regulations – even where there
is no other legal relationship between the manufacturer and the product user.
Globalization and the consolidation of industries mean that claims in general are
getting bigger, and often span multiple jurisdictions. In times of crisis, if not
handled well, product recalls and product liability can result in enormous costs
and reputational damage for the manufacturer.
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Challenges and statutory
framework of product liability
Due to the strong influence of European Union (EU) legislation, product liability
and product recall laws are very similar across Europe. However, one persistent
difficulty with product liability is that it is not uniformly regulated throughout the
EU, let alone the world.
1. GERMANY
In Germany alone, product liability law relates to the four areas of: contract law,
tort law, the Product Liability Act (Produkthaftungsgesetz) and the Product Safety
Act (Produktsicherheitsgesetz), with the first three areas falling under private law
and the last area under public law. As soon as products are sold abroad, local
product liability laws also apply, some of which differ significantly from the
German rules. This illustrates just how complex the matter of product liability is
for manufacturers and how demanding the resulting legal requirements are.
The Product Liability Act liability applies to manufacturers and their suppliers,
“quasi-manufacturers” and importers into the EU. A quasi-manufacturer is a
business that attaches its name, trademark or other denotation to a product, its
packaging or its instructions. Quasi-manufacturers are treated as manufacturers
for the purposes of the Product Liability Act. Similarly, the importer of a product
into the EU for the commercial purpose of sale, hire, lease or any form of
distribution in the course of business is deemed to be a manufacturer. The term
“manufacturer” is used in a similar manner in the German Civil Code.
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2. AUSTRIA
Austrian product liability law is similar to that of Germany. For product liability,
the most important legal basis is the Austrian Product Liability Act
(Produkthaftungsgesetz). For product recalls, the Austrian Product Safety Act
(Produktsicherheitsgesetz) is of special importance.
The Product Liability Act defines “products” simply (and broadly conceived) as
movable tangible property (including energy) and “defective products” as
products failing to provide the safety which, taking all circumstances into
account, may be reasonably expected. The Product Liability Act, therefore, has a
wide scope of application and stipulates liability without requiring that the defect
was culpably caused. Liability can result from both personal injury and property
damage caused by a defective product.
Product liability applies to the manufacturer as well as the party responsible for
importing the goods to the EU. The manufacturer is the party responsible for
manufacturing the finished product, a raw material or component part. Similarly,
liability extends to so-called quasi-manufacturers (i.e., a party which designates
itself as producer by affixing to the product its name, trademark or other
distinguishing feature). In general, the retailer (or wholesaler) is not liable under
the Austrian Product Liability Act, provided that it supplies the injured party,
within a reasonable period of time, with the name of the manufacturer or – in
the case of imported products – of the importer or the party that supplied the
product. Liability only arises vis-à-vis consumers and for damages exceeding
€500 not suffered by an entrepreneur who has used the product. Product
liability cannot be waived or otherwise limited or excluded.
3. PORTUGAL
In Portugal, the legal regime applicable to product liability mainly results from
the transposition of the Council Directive 85/374/EEC dated 25 July 1985.
Who is legally considered liable for a product?
• Under the Portuguese legal regime, the manufacturer is liable, regardless of
fault, for the damages caused by defective products that it places on the
market (principle of the objective liability of the manufacturer).
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Who qualifies as a “manufacturer” under the law?
• For product liability, a manufacturer is any manufacturer of a finished
product, a component part or raw material, as well as any person who
presents themselves as the manufacturer by putting their name, trademark or
other distinguishing feature on the product.
• Furthermore, the following are deemed to be manufacturers for product
liability purposes: (i) any person who, within the EU and in the course of its
commercial activity, imports from outside the EU products for sale, rent,
lease, or any other form of distribution; and (ii) any provider of a product
whose EU manufacturer or importer is not identified, unless upon receiving a
written notification, it informs the injured person, in writing, within three
months, of the identity of said EU manufacturer or importer, or of a former
provider.
When is a product considered defective?
• A product is considered defective when it as not safe as was expected,
considering all the circumstances: its presentation, the relevant reasonable
use, and the time at which it was placed on the market. A product is not
considered defective in the event that an improved product is subsequently
placed on the market.
Notwithstanding the above, the manufacturer is not liable if it proves that:
i. It did not place the product on the market;
ii. Taking into account the circumstances, it may reasonably be considered
that the product was not defective when it was placed on the market;
iii. It did not manufacture the product for sale or for any other form of
distribution for commercial purposes, nor was the product manufactured or
distributed by it in the course of its business;
iv. The defect is due to the conformity of the product with mandatory rules
settled by the public authorities;
v. The status of scientific and technical knowledge at the time it placed the
product on the market did not enable it to notice the existence of the
defect;
vi. In the case of a component part, the defect is due to the design of the
product into which the component part was incorporated, or the defect is
due to the instructions provided by the relevant manufacturer.
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• In case several people are identified as responsible for the damage, they are
held be jointly and severally liable.
• Where a fault on the part of the injured person has contributed to the
damage, the court may – considering all the circumstances – reduce or
exclude the indemnification due to the injured person.
What kind of damage may be subject to compensation/indemnification?
• Damage arising from death or personal injury and damage caused to
property other than the defective product, provided that the such property is
typically intended for private use or consumption and the injured person has
mainly employed it for such use. Notwithstanding, the damage caused to the
abovementioned property will be compensated solely if the amount of the
damage is higher than an amount set by law (currently €500.00).
• Indemnification is aimed at compensating the actual loss suffered (courts do
not impose punitive or exemplary damages), to ensure the injured party’s
return to the situation in which it was before the wrongful conduct (including
both the actual loss and injury and, if applicable, loss of profits). Both material
and non-material damages can be claimed by the injured party. Liability in
relation to the injured person may not be limited or excluded. Any provision
to the contrary is deemed null and void.
• The injured person’s right to compensation expires three years from the date
the injured person is aware or should have been aware of the damage, of the
defect and of the manufacturer’s identity. Ten years after the date on which
the manufacturer placed the defective product on the market, the right to
compensation expires, unless the injured person has already taken legal
action.
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The injured party must produce evidence of the defect, the damage and a causal
link between the two. Nevertheless, the injured party is not required to provide
evidence that the defect was caused by the manufacturer and that there was a
specific defect in the product at the time it was placed on the market. This is
assumed by law and it is up to the manufacturer to disprove it.
Most product liability actions in court are not decided by a settlement. There are
no rules or procedures governing settlements. In general, the parties are free to
settle their disputes. In case of multiple parties, each party can settle its claim,
but this does not affect the claims of the other parties.
Regarding the sale of consumer goods and related guarantees (applicable to
sale and purchase contracts executed between a professional seller and a
consumer), the seller is liable for the non-conformity with the contract (i) of a
movable good for a period of two years and (ii) of real estate for a period of five
years. However, the period of two years for movable goods may be reduced to
one year in case of a used movable good, provided that the reduction is
accepted by the consumer.
In case of non-conformity of the product with the contract, the consumer is
entitled to have the product repaired or replaced free of charge, to have the
price duly reduced or to have the contract cancelled. The consumer must notify
the seller of the non-conformity of the product within two months in case of a
movable good or within one year in case of real estate from the date the non-
conformity is noticed. Currently, the law provides for a maximum period of thirty
days for the seller to repair or replace the product in case of non-conformity and
establishes a new warranty period when the product is replaced.
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4. ITALY
In Italy, product liability is mainly regulated by the Italian Consumer Code (Codice
del Consumo) and, on a complementary basis, by tort law and product safety
law. For international sales, the Italian Consumer Code allows consumers to take
legal action against the manufacturer in its home country and according to its
laws.
In accordance with the rules of the Italian Consumer Code, liability applies not
only to the manufacturer, but also to the suppliers of goods, and to importers
into the EU. The latter can be held liable in the absence of any other
representative of the original manufacturer. Furthermore, the manufacturer is
not only the party that produces the finished product, but also the producer of
parts of the final product, which implies that multiple manufacturers may
therefore be held jointly and severally liable.
5. FRANCE
In France – as with Germany and Austria - product liability may be invoked on
several grounds, in particular under product safety law (French Consumer Code),
under the EU product liability act (Directive 85/374/EEC of 25 July 1985 on the
approximation of the laws, regulations and administrative provisions of the
Member States concerning liability for defective products - transposed in the
French Civil Code), and under contract law or tort law (French Civil Code).
• Product safety
The French Consumer Code lays down a general safety obligation applicable to
the manufacturers of products and their distributors, entailing several
consequent obligations (obligation to inform, to trace products, to report risks,
etc.) (Articles L. 421-1 et seq. of the French Consumer Code).
The notion of “manufacturer” includes:
i. The product manufacturer, if established in the EU, or any other person
presenting themselves as the manufacturer by putting their name,
trademark or any distinguishing feature on the product;
ii. The representative of the manufacturer, if the latter is not established in the
EU, or the importer of the product; or
iii. Other professionals in the distribution channel, if their activity is likely to
affect the safety features of the product.
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This general regime applies to:
i. All users of the product, either consumers or professionals; and
ii. All products which are not subject to specific regimes or EU regulations.
Any product which does not fulfill this general safety obligation is either
prohibited or regulated by specific national decrees.
• Other regimes applicable to product liability
Aside from this general obligation related to product safety, a product user may
seek compensation for damage in the event of an accident caused by a product
on other grounds, in particular:
If the damage was caused by a defective product, the product user/victim
must act on the ground of the defective product liability regulation (Articles
1245 et seq. of the French Civil Code);
If the damage was caused following the performance or non-performance of
an agreement entered into with a professional, the product user/victim must
act on the ground of contractual liability (Articles 1217 et seq. of the French
Civil Code), in particular on the basis of pre-contractual information (Article
1112-1 of the French Civil Code and/or specific provisions of the French
Consumer Code if a consumer is involved);
If the damage occurred outside any agreement, the product user may act on
the basis of tort law (Articles 1240 et seq. of the French Civil Code).
French case law specifies that a victim cannot combine legal actions on the
grounds of both contractual liability and tort liability (French Supreme Court, Civil
Chamber, 9 March 1970; 9 May 1973).
The liability regime for contracts or torts may be triggered by any damage,
whether material or physical, suffered by the user.
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Challenges of product recall
Tougher regulation and harsher penalties, the rise of large multinational
corporations and increasingly complex and consolidated supply chains, the
current socio-economic landscape, increasing threats of litigation, technological
advances in product testing, as well as heightened consumer awareness – and
growing use of social media – are just some of the many factors contributing to
the significant increase in exposure to the risk of product recall over the past
decade.
Making an informed decision in a recall situation is crucial and is an area where
planning can really pay off. Ultimately, a company will need to decide whether
their product is at fault and if it needs to be recalled. This decision is not always
black and white.
A product recall can take the form of a request to return, exchange, or replace a
product after a manufacturer or consumer watch group discovers defects that
could hinder performance, harm consumers, or generate legal issues for the
producers. Where action is required and time is of the essence, an exact plan
needs to be followed to mitigate any damage to the manufacturer or company
and each step must be executed with due care and precision. To avoid and
minimize potential litigation or governmental exposure, the best way to act is to
issue prompt, clear, and concise notice to all persons affected by the recall,
including direct notice to end users or consumers whenever possible.
Some of the recurring and important questions across all jurisdictions in
connection with product recalls are therefore as follows:
• What steps to take in case of a defect?
• How is a recall organized?
• Who bears the costs?
• When is it necessary to notify the authorities?
• Which authority should be notified?
• What information must such notification contain?
• What post-sale duties exist?
When affected by a recall, it can be beneficial to work with a corporate
communications or public relations specialist to ensure the appropriate messages
reach the correct audiences. In addition, working with legal counsel can help the
affected organization understand the full extent of its legal risk and take an
appropriate course of action. Having a response plan will help to ensure the faulty
products affect as few people or organizations as possible and will also help
reduce the difficulty and expense associated with product recalls.
Additionally, it is important to keep in mind that certain markets, such as children’s
products or medical products, can require additional steps in the event of a recall.
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Our services
Practices for handling product recalls differ across Europe and the rest of the
world.
However, our experience enables us to combine market knowledge with legal
expertise to help our clients manage product compliance and liability risks and to
take corrective action in a broad range of industries and under every jurisdiction.
Our legal services range from preventive advice and the development of risk
avoidance and recall strategies, to product safety law and product certification, the
drafting and negotiation of quality assurance agreements, coordination with
insurers and contentious litigation in product liability cases – tailored to the needs
of our clients and regardless of the jurisdiction. We manage and coordinate
national and international product recalls and guide your company safely through
a crisis. We help you avoid mistakes when communicating with authorities at
home and abroad and minimize the risks associated with criminal and regulatory
offences.
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Contacts
Benjamin Balensi
Deloitte Global Consumer Business Leader, Deloitte Legal
France
bbalensi@taj.fr
Germany
Andreas Leclaire
Director, Deloitte Legal Germany
aleclaire@deloitte.de
Austria
Marc Lager
Partner, Jank Weiler Operenyi (Deloitte Legal Austria)
m.lager@jankweiler.at
Portugal
Sofia Barros Carvalhosa
Partner, CTSU, the Deloitte Legal practice in Portugal
scarvalhosa@ctsu.pt
Italy
Ida Palombella
Partner, Deloitte Legal Italy
ipalombella@deloitte.it
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