• United Kingdom

• Industrials

19-12-2017

The global manufacturing sector has been hit by a series of scandals over recent months. A panoply of well-respected corporates have admitted falsifying data for products they supplied, with several industrial giants coming clean after identifying erroneous data in what has become known (in line with current linguistic vogue), as the ‘fake data scandal’.

The knock-on effects are severe, particularly since many businesses caught up in the scandal are key suppliers to major brands across a wide range of sectors both in South East Asia and in Europe and the US.

Two questions arise for our clients in the Diversified Industrials sector: First, for those businesses who are supplied by the affected businesses: what can be done to rectify the situation and ensure that associated costs are recovered? Second, how can businesses involved in product supply chains ensure that they are not the next headline, and what can they do if they discover that they are supplying products or components on the basis of inaccurate or falsified data? 

Managing the contagion

Those businesses that have received supplies of falsely certified products should be acting quickly to understand the scope of the issue and assess in particular whether safety implications arise.

In Europe, most products intended for, or likely to be used by consumers are covered by the General Product Safety Directive (EC 2001/95), which imposes an obligation on producers (defined to include those importing into the EU or placing their brand on the product, as well as the manufacturer) to ensure that all products placed on the market are safe. It is an offence to place unsafe products on the market, whether or not this arises from the fault of the producer, and even if the lack of safety was not known to the producer at the time that the product reached the end user. Similar obligations exist under many sector specific regimes, including for example the Construction Products Regulations (EU 305/2011), which impose on manufacturers of construction products an obligation (Regulation 11) to take action and notify the authorities in the event of a non-conformance with applicable requirements. In many countries the supply of unsafe products is an offence even where they are not intended for consumer use – Section 6 of the UK’s Health and Safety at Work Act imposes strict safety obligations on manufacturers, backed up with the threat of substantial fines or even imprisonment.

Manufacturing businesses supplied with materials or components which may be falsely certified should:

• Act quickly to understand the scale of the issue and the products affected, and assess whether a safety risk arises. Where appropriate, input from external technical experts should be sought to investigate the implications.
• Where a risk is identified, the business should put a plan in place quickly to address the situation, whether by way of a recall, circulating updated instructions for use or through some other appropriate measure. Where required under the applicable legislation, regulatory authorities should be notified of the situation and of the planned response.
• Given the media attention surrounding the scandal, preparations should be made to deal with any publicity arising, including through responsive press statements and Q&A sheets. Care should be taken to avoid an overly defensive or evasive message. 
• Contractual terms with suppliers and customers should be scrutinised so as to understand the allocation of responsibility for certification and the existence and extent of warranties and indemnities. Where there is a possibility of recourse against the supplier, they should be notified in writing of the situation and steps being taken, and informed that the associated costs will be sought from them.
• A careful record should be kept of the costs incurred in rectifying the situation and steps should be taken to preserve associated documentation, to maximise the prospects of recovery and to ensure that the business complies with its disclosure obligations in the event of subsequent litigation.

Don’t be the next headline

The recent headlines underline the importance for businesses in product supply chains of interrogating and analysing their processes, and those of their suppliers, to ensure that all quality checks, and particularly those impacting on safety, are working properly.

Businesses relying solely on certificates, and not looking beyond at further due diligence steps to assure themselves as to the quality of components and processes are taking a risk. The recent news should be a wake-up call in particular for the many businesses who incorporate rights of audit in purchasing contracts, but never exercise such rights by visiting supplier factories or auditing test results. 

Product liability law imposes a strict, ‘no fault’ liability on producers for injury or property damage caused by unsafe products they place on the market or which bear their branding. The fact that the producer was duped by erroneous certification from a disreputable supplier is no defence to such claims. Whilst it may be possible to recover losses through contractual claims, this cannot be used as a means of averting the initial liability, and the extent to which the contract is effective in enabling recovery is highly dependent on the terms in place as well as the creditworthiness of the supplier/certifier.

Facing the music

Managing the impact of someone else’s failures is hard enough. Where false or inadequate certification is identified to have taken place in your own business, the implications may be much more serious. Again, the business may have specific legal obligations regarding the safety of its products which require it to take urgent action in the market and, in many cases, to notify regulatory authorities. In addition, where information about the issue has reached, or brought to your attention by the media, there will be an immediate PR crisis to address. Businesses in this situation should avoid immediate comment before the position has been properly examined and the facts are known. At the same time, a full and frank investigation should be undertaken. The enquiry should address not only the extent of false certification, but the cause: where a failure on the part of an employee or contractor is identified, consideration should be given as to whether disciplinary action or contractual/tortious claims should be pursued. Where investigations are undertaken for the dominant purpose of obtaining legal advice in respect of actual or contemplated litigation, documents produced may be protected by legal privilege.

Consideration should be given at the outset to the insurance position. Do the policies of the business cover the scenario in question? What are their notification requirements? Care should be taken to avoid prejudicing cover by notifying too late, or taking critical decisions without consulting insurers.

Early, clear and precise communication to customers and others affected is critical both to ensure user safety (which must always be the priority) and to protect the reputation of the business. At the same time, care must always be taken to avoid creating unnecessary panic, and to ensure that the facts are properly understood. Consideration should be given as to the scope of the businesses’ responsibilities for certification. Where other parties in the supply chain had taken responsibility under the contract, care should be taken to ensure that the ability of the business to recover from them is not prejudiced. Equally, to avoid lasting damage to your brand it is important to avoid giving the impression that you are passing the buck and failing to take responsibility for your products. The safest strategy will usually be to provide a frank and honest explanation of the situation and the planned response to affected customers, learn the lessons and take action to avoid a repeat. 

About the authors

Richard Matthews and Peter Shervington are product liability specialists at Eversheds Sutherland. Richard and Peter have a wealth of experience in assisting clients across multiple sectors to manage product safety and conformance issues, handling recalls and regulatory investigations and navigating major commercial disputes arising from product defects. Tightening regulations and an increasing drive towards user safety mean that they are increasingly involved in assisting forward thinking clients to avoid and prepare for product safety crises through crisis management planning, compliance audits and management training.