By: Jeffrey A. Brown, Partner

Globalization of industry has resulted in materials and components often being supplied from multiple markets across the world. When something goes wrong, and claims arise, it can prove difficult to enforce your contractual rights to indemnity. What could go wrong?

Unfortunately, lots. If your client, as the manufacturer or local distributor, has not taken effective steps to ensure that its product is manufactured properly, your client could find itself facing substantial fines from regulatory authorities along with class actions that can put a serious dent in your client’s bottom line. [show_more more=”Show More” less=”Show Less” color=”000000″ align=”center”]

As experienced product liability litigators, we see a number of common difficulties that might be avoided through effective negotiations and risk allocation When advising your client, you should be discussing the issues outlined below as part of any supply agreement, particularly when it involves multiple jurisdictions.

Product Design:

  • Who is responsible for the design of the product or the particular component?
  • If the supplier is responsible, what steps can your client take to ensure that the component is acceptable?
  • Will there be a clear line between your client’s responsibilities and those of the supplier, which can be memorialized in the agreement?
  • Consider whether your client should be entitled to access all drawings for design and the manufacturing process. Do you want your client to be involved in the process or should it be left to the supplier in order to keep those roles clear and distinct?

Product Testing:

  • Who tests the product? It is preferable that all product testing be performed at an independent laboratory. If product testing takes place at the supplier’s facility, it should be performed under the supervision or audited by an independent party, and possibly including one of your company’s knowledgeable representatives. Again, it should be clear that the responsibility for testing and its accuracy will always rest with the supplier.

Product Certification:

  • Is independent certification necessary for the component, and if so, how is certification achieved?
  • Is the certification authority used by the supplier reputable? Your client’s defence that the product was certified to all safety standards, will ring hollow if the certification authority merely rubber-stamped the certification. Consider retaining independent counsel in the supplier’s jurisdiction with product liability expertise. Their assistance can help your client evaluate the certification process, and other local issues, making the process more efficient and reliable.

Design & Manufacturing Consistency:

Where a company has effectively managed the above risks, it often takes a company by surprise when its product ultimately experiences widespread failures: “We thought we did everything right!” Unfortunately, the supplier sometimes makes changes to its product or components without notice. Where your client is purchasing an integrated component, it may be impossible to identify changes just by looking at the product. The solution can be expensive. Therefore, consider the following:

  • The supply contract should include a right to audit the supplier’s facilities to ensure that the product is being made properly.
  • If the supplier’s component is such that a change could only be identified by testing, then your client may need to ensure testing is done on a regular basis.

Notice of Failure:

If something goes wrong, the only way to get ahead of the problem is to know it exists. In order to avoid disputes, suppliers may not reveal the existence of a problem, or the extent of it. Information sharing is crucial.

  • It may be that the component in your product is sold to other companies. You need to ensure that contract terms require that your client is immediately advised if there are failures in other products using that same component. Unfortunately, it is ultimately the integrity of your client’s supplier that dictates whether it will be forthright with your client regarding any failures, or whether it will try to “manage” the problems themselves.

The issues outlined above are a subset of the opportunities available to limit your risk of product failures. The financial stability of the supplier can be crucial. You should also attempt to manage risk via contractual provisions such as insurance, the right to control the defence of any claims, defined responsibilities, indemnification, and law of the contract.

Finally, you should consider how you will enforce all of these rights: can they be backstopped with some form of attornment, bonding or insurance so that you are not fighting jurisdiction battles when claims arise? Once you have considered all of these issues, you will be in a better position to impose responsibility on the supplier.

Jeffrey A. Brown is a partner at Theall Group LLP. He is engaged in all aspects of the defence and trial of civil matters, including insurance law, commercial litigation, product liability and enforcement of secured transactions. Jeff has appeared as counsel at the Ontario Superior Court of Justice, Divisional Court and Court of Appeal. He was admitted to the Ontario Bar in 1999 after having completed his articles as a law clerk at the Federal Court of Canada for the Honourable Mr. Justice Teitelbaum. Jeff is co-author of the annually updated loose-leaf text, Product Liability: Canadian Law and Practice (Canada Law Book)

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