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By Colin Loveday and Sheena McKie, Clayton Utz

Suppliers and retailers of goods may find themselves in difficult positions if they unwittingly supply goods which later turn out to be non-compliant, not fit for purpose or defective.  Supplying goods which do not meet expectations of performance may lead to time-consuming remedial action including customer complaints, product recalls and, potentially, litigation.  The position for suppliers may be further complicated if the goods or a component part have been manufactured overseas.  Not all product defects manifest themselves immediately after supply, installation or use.  Understanding some of the legal issues may help in managing and thereby minimising those risks.

In our experience, responsible manufacturers have not only an excellent appreciation of quality assurance and quality control systems, but also their legal obligations and the potential risks that have to be managed associated with their products.

However, the so-called ‘Chinese drywall’ litigation in the US has demonstrated that not all in the supply chain are necessarily quite as aware.  In the US between 2005 and 2008, hundreds of millions of sheets of drywall (plasterboard) were imported from Chinese manufacturers to assist in the rebuilding of homes destroyed or damaged by hurricanes Rita and Katrina, as well as the effects of a housing construction boom.  After installation it was found that the drywall had been badly manufactured and contained high levels of sulphur which could corrode electrical wiring and gas pipes.  There were also real concerns about potential adverse health effects.  The drywall product was inconsistently labelled, and was incorporated in construction work as a commoditised product without any specific regard to branding.  This made it extremely difficult to identify the affected drywall.  It also turned out to be extremely difficult to identify the relevant manufacturers of the affected product.  A wave of litigation followed and it is still ongoing.  It has proven to be an extremely expensive (and in some cases catastrophic) event for many US suppliers.

While the Chinese drywall litigation has been predominantly a US experience, we have seen several instances here in Australia in recent years that demonstrates that the legal issues that arose in the Chinese drywall litigation are not problems restricted to the US.

How can I protect my business from a manufacturer supplying me with faulty goods?

If goods are installed or attached to premises, more difficulties arise in assessing the scope of any liability as well as appropriate plans for remediation. However, here are some steps that you may wish to consider taking.

• Know your suppliers: Perform due diligence on the manufacturers from which you purchase goods.  Visit factories, review evidence of compliance with relevant laws or Standards, perform your own testing of products.

• Tighten your contracts: Make sure you have appropriate contractual protection, which allocates responsibility for risk appropriately.

• Maintain appropriate insurance: Ensure that both you and your suppliers hold appropriate insurance, which will give you some comfort in the event that a product is faulty.

• Promote goods responsibly: Ensure that information you supply with goods, and any promotion you do, is clear and consistent with the intended use of the product.

• Implement procedures for good traceability: Establish and maintain procedures that will help you maintain traceability of goods in the supply chain; e.g. to identify customers of goods in the event of a recall, particularly for goods which will be installed in premises.

What are my statutory obligations as a supplier of goods?

If the goods or products that you are supplying are likely to be used by consumers then it is important to understand the statutory obligations that exist under the Australian Consumer Law (ACL).

The ACL is the principal consumer protection legislation in Australia.  The ACL is found in Schedule 2 to the Competition and Consumer Act 2010 (Cth).  It has force of law both as a law of the Commonwealth and a law of each State and Territory.

The ACL contains powers granted to the “regulator”, which includes the Australian Competition and Consumer Commission (ACCC), as well as each State and Territory body charged with consumer protection (e.g. NSW Fair Trading).  It also confers private rights of action on consumers who have suffered loss or damage from goods or services supplied to them.

Many of the statutory causes of action under the ACL are only available to persons who acquire goods or services as a “consumer”.  A person acquires goods or services as a consumer if, relevantly, the amount paid or payable for goods or services does not exceed $40,000, or the goods are of a kind ordinarily acquired for personal, domestic or household use or consumption (sections 3(1) and (3) of the ACL).

A person who acquires goods for the purpose of re-supply or for the purpose of using them up or transforming them in trade or commerce in certain circumstances does not acquire those goods as a consumer (section 3(2) of the ACL).  This may influence the liability that a retailer may have, for example, where the retailer supplies goods to an intermediary such as plumber, who uses those goods to supply a product or service to a consumer in the course of their own business.

Under the ACL, a supplier of goods provides certain “consumer guarantees” to consumers, which cannot be excluded by contract.  These include guarantees that goods supplied will be fit for their purpose and of acceptable quality.  Where the consumer guarantees have been breached, a supplier may be liable for loss or damage suffered by a consumer (Parts 3-2 and 5-4 of the ACL).

Manufacturers of goods may be liable where goods supplied do not comply with the guarantee as to acceptable quality (sections 54 and 271(1) of the ACL).  Manufacturers may also be liable for goods which have a “safety defect” (sections 9, 138 to 141 of the ACL).

Sometimes a retailer may also be a manufacturer…

The definition of a “manufacturer” not only includes a person or organisation who grows, extracts, produces or assembles goods, but the definition also includes persons who:

• hold themselves out to the public as a manufacturer;

• cause or allow their name, brand or mark to be applied to goods;

• import goods into Australia, where the manufacturer does not have a place of business in Australia, even if the importer is not the manufacturer of goods (section 7 of the ACL).

A supplier may find itself liable as a manufacturer for goods with a safety defect where the manufacturer of goods cannot be identified (section 147 of the ACL).  Section 147 allows a consumer to ask a supplier for particulars of the manufacturer of the goods (or of the supplier one step up the supply chain).  A failure to provide such information within 30 days can result in the supplier being deemed to be the manufacturer for the purposes of any subsequent liability action.  This reinforces the importance of knowledge of your suppliers.

In addition, a supplier of goods may become a target for liability in circumstances where a manufacturer of goods has become insolvent.

Am I still liable if a customer misuses goods?

A supplier has mandatory reporting obligations to report death or serious injury or illness of any person of which it becomes aware, which may be associated with the use or foreseeable misuse of goods (section 131 of the ACL).

Whose responsibility is the recall of goods?

Section 128 of the ACL sets down the notification requirements where “a person” voluntarily takes action to recall consumer goods of a particular kind (including consumer goods that have become fixtures since being supplied), where the consumer goods or a reasonably foreseeable use or misuse of goods will or may cause injury to a person.

In the absence of a compulsory recall order from the ACCC or a state regulator, the determination by a manufacturer or retailer to recall goods is governed by the common law principles of negligence.  A supplier of goods must determine whether a recall is a reasonable step to protect consumers from a reasonably foreseeable risk of injury.

It does not matter where a person sits in the distribution chain for goods.  In making a determination about whether or not to recall, a manufacturer or retailer should consider:

• the magnitude of the potential harm involved;

• probability of such harm occurring;

• availability and effectiveness of alternative remedial action; and

• degree of knowledge in potential users of the potential harm.

If a manufacturer has little or no presence in Australia, it is likely that the retailer or distributor of goods will need to take a more proactive role. ■

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