What would your business do if someone alleges a product supplied is faulty? Carys Everitt of Bailoran Solicitors suggests a plan of action.

Last year IKEA were forced to recall 29m chests of drawers and dressers after 8 children were killed (Source: Independent 21/11/17)

This is an extreme example but failure to plan for potential product liability issues places your business at significant risk.

We set out below our recommended plan of action.

Determine the risk to the business of exposure to claims

• Establish the level of risk early to guide you towards the appropriate resolution.
• The risk will vary depending on the type of product, the industry involved, the production process, the alleged defect, who the end-user is, etc.
• Remember that risk can be both financial and reputational.

Review your insurance coverage

• Is there any? If so, what is covered? Policy terms vary.
• If cover is available, check the limit of indemnity and level of excess.
• What exclusions apply?
• Are you required to notify the insurer within a set timescale?
• Check the policy wording carefully and seek advice if anything is unclear.

Locate and preserve evidence in relation to the product itself and the alleged defect

• What is the product? Was it made to standard specification, or was it bespoke? What is its intended use/application?
• How has the issue arisen?
• Ensure all potentially relevant evidence is preserved, including all documents and evidence relating to the contractual relationship. This step is also vital to establish the strength/weakness of your position.

Identify the contractual basis upon which the product was sold/supplied

• Scrutinize the ‘contract’ with your customer and with your supplier.
• There may be a written and signed contract in place, or the contract may purport to be subject to standard terms.If so, thoroughly investigate the sequence of events to establish which standard terms (if any) apply.

Analyse the alleged defect and its cause

• Understand and analyse the reason why the product might have failed and whether any failure caused the alleged loss.
• Does the business have the right to recover the product for the investigation? What are the potential consequences of doing so?
• You may need to instruct technical, scientific or industry experts to successfully defend a product liability claim.

Identify the supplier of the product, or any component parts

• Consider recovery against the supplier.
• Check the contract terms carefully.
• The supplier may need to be notified if you intend to seek any indemnity.
• Be wary of any time limits/limitation issues.

Consider the legal liability issues

• Is there a potential breach of the contract by the business (or supplier)?
• Has the business (or supplier) accepted any relevant specific liabilities, for example indemnities, under the contract?
• If the end-user is a consumer, the Consumer Protection Act 1987 (CPA) imposes a strict liability on the ‘producer’ of a defective product, with no requirement to prove fault.
• For business customers, the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 imply terms into your contract that goods supplied will be of satisfactory quality and fit for their purpose.
• Claims can also be pursued based on negligence. Has the business breached any duty of care owed to the customer and/or end-user?
• Is the claimant ‘time-barred’ from proceeding with their claim?
• Clarify at the earliest possible stage which types of claim are being, or may be, brought and when the relevant limitation periods expire (under the Limitation Act 1980).
• Identify possible defences available to the business.

Consider any applicable regulatory issues

• If the end-user is a consumer, the General Product Safety Regulations 2005 (GPSR) will apply. These oblige ‘producers’ and ‘distributors’ to supply ‘safe’ products.
• Other regulations apply to certain types of products (e.g. food and drink, toys).
• Is there an obligation to notify the relevant authority and take steps to mitigate the risk of harm to consumers (e.g. a recall)?
• If a health and safety risk arises, check whether other products (perhaps from the same production run or batch) are similarly affected.

Appreciate the commercial realities/sensitivities

• This is crucial. There may be a fine balance between the interests of the business in a continuing business relationship and protecting the business from the identified risks of a product liability claim.

Consider the appropriate setting and process for resolving the dispute

• The claim may be dealt with through negotiation, litigation in the courts, arbitration, adjudication or Early Neutral Evaluation (by a court).
• The contract itself might specify the process or forum which must be used.
• This might direct the business’s investigations and actions throughout the entire process.

This checklist is not exhaustive. It gives an indication only of some typical matters to be considered in the event of a potential product liability claim. We recommend that companies put in place a policy to strengthen its position and so that the relevant directors can act swiftly to limit commercial exposure.