The EU’s forthcoming directive on product liability should make you nervous if you import products to and sell in Europe.
To cover this important topic, two highly experienced guests provide their insights and advice:
- Clive Greenwood, compliance counsel at Liangma law firm in Shenzhen, originally from the UK. Clive has been on this podcast a number of times. He has 30 years of quality assurance and compliance experience, with special focus on EU compliance laws
- Prof. Simon Choi has more than 30 years of international management experience. He is a senior lawyer in Hong Kong and the United Kingdom. He graduated from Peking University, University College London and the University of Hong Kong Law School. He serves as an independent director of many listed companies and has extensive legal education and practical experience around the world. He once served as the global legal director of TCL and led TCL towards internationalization for nearly ten years. In 2013, he was appointed as a co-professor of the School of Law at Zhongnan University of Economics and Law.
Prefer listening to reading?
This proposal for a new version of the directive on this topic comes into force between March to June 2024, with a one-year grace period, so by mid-2025 its changes will affect EU importers. A key new point is that there must now be someone (or some company) in the EU who is liable for damages and injuries caused by unsafe products and this may even be down to the individual level (it may be a director or CEO of the importing business, for example). But there’s a lot more to it than that as we’ll cover…
What is the intent of the directive?
The intent of the regulators, very broadly speaking, is to improve the following points where the consumer is concerned:
- Transparency in the product manufacturing process
- Consumer identification of the source of the product
- The environmental risk relating to the product
- The ability of the consumer to take direct action related to product liability (that’s where this revision will come into play)
Fundamentally, market surveillance authorities will now have the means to prosecute a person in the EU if there are issues with any imported product as this covers ALL products. Until now, some CE-marked products were treated in this way, but soon it will be true for all products. Also, when it comes to liability, there will be no real distinction in the supply chain between manufacturer, importer, distributor, and retailer; these parties can be held liable for product liability claims jointly and severally. (04:23)
What does this directive change for economic operators on the distribution/retail side of things?
Product transparency requirements, such as the upcoming digital product passport, are enshrined in this directive. The product will need to be traceable from the manufacturer to the end-user and all supply chain parties, regardless of size, will be liable.
Current, economic operators’ liability is often shaped by contractual provisions. Typically, retailers transfer liability for product problems back to their suppliers, but that will no longer be an available loophole.
This might affect distributors’ or retailers’ appetites to stock products that are in riskier categories, such as electrical appliances and kids’ products because their liability is now unlimited…this will be worrying news for retailers and wholesalers in general. In addition, if a distributor or retailer is taken to court in Europe, they will need to prove that they have done due diligence on the product & on the factory and to provide the ‘technical file.’ Without this, the product will be considered to be defective by default! So these importers will likely now need to beef up the due diligence and compliance work they do on the products they import and sell, paying particular attention to creating a thorough technical file and product passport. If certain products appear to be too risky to continue importing they will simply drop them and stop importing them, as Amazon has done recently with certain product categories.
Everything is migrating towards the integrated product passport and transparency throughout the production production process. (06:53)
Note: the digital product passport is one of the requirements of the upcoming Ecodesign for Sustainable Product Regulation. The detailed requirements have not been made public, yet.
Transparency in the supply chain.
The burden of proof exposes all of the economic players equally. The technical file must include transparent information about the entire supply chain from procurement of materials to manufacturing processes to shipping to the distribution channels in your country, and so on. In the past, a product declaration was enough, but now you need to prove what was done and by whom at every step of the way in the supply chain. You may use the non-legal method of using blockchain technology to collect evidence at every node of the supply chain and, furthermore, you will probably need an auditing company to audit the supply chain with compliance in mind to ensure that it’s compliant with EU rules and regulations. (12:47)
Even if a factory in China can now be held liable for product problems as a supply chain actor under this new legislation, realistically, can an importer obtain compensation from them?
Many Chinese factories sign no contract with their customers, or, even when they do, they believe they can’t be held liable for problems after shipment. It’s a commonly-held belief that it is almost impossible for a foreign customer (the buyer/importer) to obtain money from a Chinese supplier due to their location, Chinese law, etc. But how true is this?
Many importers fail to use an adequate contract in China, agreeing on something too simple with their suppliers that does not legally cover them against any losses or place adequate liability on the manufacturer by Chinese law.
Some advice from Prof. Choi:
- Contracts need to be well-written and enforceable by Chinese law (so probably created by a law firm specializing in Chinese law), stating that the manufacturer (exporter) will create products that comply with EU laws.
- Contracts should call for international arbitration in a third country that is a signatory of the New York convention like Hong Kong, Singapore, the UK, etc, rather than for Chinese courts to uphold the ruling of a foreign court in, say, France or Belgium if there is a problem with the products. The former is possible in China, whereas it is unlikely that Chinese courts will uphold foreign judgements. Chinese manufacturers are usually open to agreeing to this.
EU importers would be covered by these clauses in their manufacturing contracts with Chinese factories because if they’re taken to court and held liable in the EU, they can then go after the manufacturer through arbitration to recover damages. This advice also applies to American, Canadian, and Australian companies, for example, who sell their products into the EU, too. (16:56)
How the burden of proof for manufacturers is changing.
Until now EU law would require someone accusing a product of being defective and causing a problem to provide the proof of that before the manufacturer would be taken to task. Now, the logic is going to change and the manufacturer will need to provide proof that the product complies with EU rules and regulations before it can be sold in the EU, but also will need to prove that all the preventive work to ensure the product is safe has been done. If that proof is not available, typically in the form of a technical file, the product will be assumed to be defective by a courts of law!
As a reminder: if a factory in, say, China or India is not mentioned on the product packaging/labeling information, the ‘manufacturer’ (as per EU legislation) is whoever puts their logo or name on the product and sells it in the EU, so it is typically the importer or the distributor. (24:47)
Product labelling must make it easier for any parties, especially consumers, to bring a case against a product’s seller.
Products must be labelled with information that enables parties to make a claim if there are problems. In a few years, a QR code that links to the product passport will become quite common. In parallel, various EU cities will have consumer centers that could be contacted and NGOs like the Consumer Protection Association in the UK will likely also be able to demand access to the product in question’s technical file if a consumer reports a problem. If a company then fails to provide it, that’s seen as an admission that the product is defective.
The technical file typically includes these types of documents:
- Information about the producer
- Product drawings and information
- Safety test reports based on relevant technical standards
- Factory information, audit reports, etc.
- Product risk assessment
- Declaration of conformity for the product
The authorities can then dig through this information to find the source of the problem and who is liable, even if the vendor, importer, and manufacturer are all from non-EU countries such as in the case of online shopping platforms like eBay or Amazon. (28:45)
Foreign manufacturers are going to be under a lot of pressure to change the way they do things.
Traditionally, Chinese factories and trading companies do not like to share some of the information that now needs to be in the product’s technical file as they consider this to be a trade secret. They do not willingly share their supplier identities, which, again, may be required in certain cases based on upcoming EU requirements. So they’re going to have to now become used to sharing it more openly with customers every time it is requested and a balance will have to be struck on what can and cannot be disclosed, but if they want to win business from EU importers they will have to change their ways. (32:50)
Why the product safety’s burden of proof is on the party who brings the product into the EU.
The new directive is in favor of consumers’ rights as they’re the weaker party that traditionally would not have access to information about problematic products. Now, the supplier must provide this information as the burden of proof is on them and if there is a problem their whole supply chain can be sued and someone will have to pay and each party can’t just hide behind another. This is a serious departure from the past where the buyer would purchase from China keeping in mind that goods purchased are sold with ‘buyer beware’ very much as a caveat. (34:02)
Will this directive even be possible to enforce in manufacturing in China?
The convergence of all the EU requirements regarding product design, reliability, sustainability, transparency, and liability seem to be heading in one direction: That the EU market doesn’t welcome ‘bad products’ and that loopholes and ways to hide from liability are fast disappearing for manufacturers regardless of their location.
(Note: we warned our readers about this in a past article where we looked at the new regulation about medical devices.)
The market will drive Chinese manufacturers to comply because they want the business. Suppliers who want to sell to EU customers will make the effort to comply with these quite comprehensive requirements. Those that cannot or will not will be out of the EU market, and purging ‘lower quality manufacturers’ like this is exactly what the EU Commission wants to do. The best manufacturers in China will quickly adapt, and those left behind are probably less attractive to buyers in any case. This will result in better quality, safer products in the EU and a pool of more capable manufacturers over the next few years. (37:17)
- How ISO 37301 Might Improve Chinese Suppliers’ Compliance [Podcast]
- Exploring 9 Quality Management Challenges in China [Podcast]
- The EU Ecodesign Regulation Is Coming, But Are You Prepared? [Podcast part1]
- Exploring Product Safety & Reliability Issue Liability [Podcast]
- This is not legal advice. Consult a lawyer or a compliance consultant on this topic.
- A big thanks to the team at ProductIP for their interesting webinars, through which we first heard of this upcoming directive.