product liability essay

Global sourcing could be the favorable business opportunity. However, study shows[1] that only one third of the companies who invest and operates on emerging markets are successful. The hard fact is that any business, including sourcing the components, in emerging markets has its specific risks. Prevalence of price competition instead of quality competition is the typical feature of emerging markets[2]. It may cause the troubles with the product liability to manufacturer in Australia. The contradictory Australia’s product liability law forces the risk managers to develop the particular risk-decreasing strategy in light of all risk factors. This memorandum includes the following:

-   list of relevant laws relating to manufacturers liability;

-   list of legal actions under these laws;

-   short survey of global sourcing’ risks; and

-   basic idea of risk minimization.

1. Legal regulation of product liability in Australia

The main regulative product liability law in developed countries is the EU Directive on faulty products (85/374/EEC)[3], created in 1985. It determines the legal responsibility of manufacturers for whatever products they produce. This directive became the basis for the newest Australian consumer protection laws.

“In July, 1992, Australia enacted a product liability law that tracks the European Union’s Product Liability Directive in all important respects. Previously, common law tort and contract principles governed compensation for loss or damage caused by defective products.”[4]

The product liability in Australia is regulated both with common law and statute.

The key competition law in Australia is the Trade Practices Act 1974[5]. The main tasks of the TPA are the following:

-       to provide fair competition preventing restrictive trade practices of companies;

-       to outline the legal position of the consumer  and provide the consumer protection.

TPA is the act of the Parliament of Australia, so its application is limited only to corporations. To extend the regulation parts of TPA were mirrored in Fair Trading Acts in each Australian State and Territory.  However, every state or territory can enact legislation on different subjects that can have an impact on product liability regulation, for example, the sale of goods. In July 1992 strict product liability regime was introduced, and after that the product liability litigants are in focus of statute law.

The Part V of the TPA provides the consumer protection. Its main idea is the consumer power can support the internal market regulation. This part deals with:

* Restrictive and unfair practices;

* Product safety and information;

* Conditions and warranties in consumer transactions;

* Actions against manufacturers/importers of goods;

* Product liability.

Part V includes three significant laws.

1. Section 52

Section 52 of Part V provides that: “a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”[6] This section does not allow of exclusion or exemption clauses liability in a product case, but it gives some additional advantages.  “Carelessness is not a requirement in establishing a breach of section 52 and the section does not require proof that anyone was actually misled or deceived by the conduct.”[7] In the case of contravention of the section 52 person or corporation may be required to pay damages, disclose information through publish advertisement and have certain other orders made against it.

2. Divisions 2 and 2A

To the manufacturer these divisions are significant because of the list of actions against manufacturers and importers of goods and limitations of their liability under the product liability law. The actions can be taken in respect of unsuitable goods, false descriptions, unmerchantable quality,   non-correspondence with samples, failure to provide facilities for repairs or parts, and non-compliance with express warranty.[8]  The section 74H provides that the seller has the right to recover against manufacturer or importer in the case of loss and damage.  It is important that damages are not limited to personal injuries and property loss, but include pure economic loss.

The consumer these divisions are important for their simple effect: is the good does not reach the basic level of quality, it is defective, break or wrong-functioning – then the TPA has been breached.

3. Part VA

This part contains the regulation rules in a new strict liability regime for injury loss and damage caused by defective products, which was introduced in 1992.  Generally this part imposes liability on a manufacturer (including an importer) of goods to compensate a person in the case of personal injury or loss of property caused defective good. Goods have a “defect” if “their safety is not such as persons generally are entitled to expect.”[9] If divisions 2 and 2A applied to customers only, the Part VA extended the rights of all individuals whether they were consumers or not.  Part VA is based on the European product liability directive of July 1985, but it differs from the EC Directive in the main respect.

Case law on consumer protection and product liability has built up slowly in Australia. “The two most important common law causes of action in the product liability field are that of the tort of negligence and that of breach of contract.”[10]

Unlike Part V Division 2 and 2A, and Part VA of the TPA which focus on the condition of the product, negligence law is concerned with the conduct of the manufacturer. The main idea is the duty of manufacturer to avoid a foreseeable risk of injury or damage. The courts decide whether there is a breach of duty examining the manufacture and supply of the goods, their design and manufacture or supply of the goods.

Manufacturer or supplier is expected to meet its statutory duties, too.[11]  However, this creates the further complications: the necessity to define the person or company who owed the duty, and to decide if the statutory duty was breached. It is obvious that there is no coherent system in the negligence law; that is why several defenses are available to a claim on negligence. For example, the defendant can prove that “that the plaintiff not only perceived the existence of danger, but also fully appreciated it and voluntarily accepted the risk.”[12] The implementation of Civil Liability Reform in 1992 and different local laws created the plenty of contradictory construction. Thus, the different amount of compensation can be received for the same injuries under the New South Wales Fair Trading Act 1987 (NSW) and Part V Division 2A.[13]

In summary, Australian product liability law is the tangled net of rules and definitions, sometimes opposite to each other, without coherent system. Analytics tell that in needs the immediate reform and comprehensive reconsideration.

“Multiple causes of action persist: common law negligence (including a little-noticed revival of claims for breach of statutory duty); Trade Practices Act (TPA) claims on a contractual basis; and TPA Part VA claims on a strict liability basis, modelled on the EC Product Liability Directive (generally understood as a statutory tort).”[14]

2. Legal actions under product liability law

As the link of the trade chain, manufacturing company is responsible for the quality and safety of consumer goods. All the goods supplied under the regime of strict product liability (9 July 1992) fall under product liability provisions found in Part VA of the Trade Practices.  The main administrative body regulating the application of TPA is the Australian Competition and Consumer Commission (ACCC).  ACCC promotes fair competition, regulates national infrastructure industries, informs and educates businesses and customers about their rights and obligations, has the right to take representative action in the court and so on.[15]

Some individuals have the right to act under the TPA, too. Thus, the Commonwealth Minister for Consumer Affairs has the power to declare product standards and to ban the sale of unsafe goods.

Customers can take legal action against the supplier of defective product. In the case of injury or loss aggrieved party can file for compensation.

The defectiveness of product is the subject of court examination. According the ACCC, court could take in attention the various factors, including the following:

  • “how and why the product has been marketed
  • its packaging
  • the use of any mark in relation to it
  • instructions for, or warnings about, doing or refraining from doing anything with or in relation to the product
  • what might reasonably be expected to be done with it
  • the time when it was supplied.“ [16]

The product liability provisions of the TPA generally apply to a company, which manufactured or imported the product, or sold own brand goods manufactured for it under license.

The manufacturer liability could arise as a result of:

“(a) any contractual rights or rights in tort (such as negligence) the manufacturer owes to its distributor, subject to any limitation of liability provision in its contract;

(b) rights to compensation for misleading and deceptive conduct, where representations are made (either expressly or by implication) to the distributor and/or the enduser that the products are of a certain standard or fit for certain purposes (ss52/53);

(c) a statutory indemnity in favor of its distributor, covering the distributor’s liability under any warranties it owes to its customers implied under the TPA (s74H); and

(d) the statutory right consumers have to seek compensation directly from the manufacturer for certain sub-standard goods.” [17]

Breaches of the consumer protection provisions cause criminal and civil sanctions. Criminal sanctions are mostly fines, civil remedies. The civil remedies include restitution, injunction, compensation orders, and disclosure information through public advertising.  At common law the cases of injures due to defective product are the object of law of Australian State or Territory. However, recently new provisions on personal injury claims were included in the TPA.[18] As the result different parts of TPA define the measure of damages differently.[19]

Corporation manager may be disqualified from managing activities or specific activities. Moreover, ACCC may order to recall the defective product from the market. Usually ACCC proposes the supplier to recall the defective product voluntary; if supplier refuses or delays recall, ACCC may appeal to Federal court.

Recall is always a bad news for producing or manufacturing company. First of all, the company sustains financial loses. In some industries it is possible to replace the defective components and sell the product again. In other industries producer must utilize the whole lot. In any case, the profit of the company decreases.

However, another loss is worse than the negative profit, the loss of reputation and goodwill. The most recent example is the recall of 1323 vehicles by Honda Australian. More then thousand of Accord and Civic models were recalled for the potentially fatal airbag defect. This recall was not limited to Australian market. In America American Honda Motor Co recalls 440,000 units of Accord, Civic and Acura too.

These vehicles were produced between 2001 and 2002, and this is the second recall of Hondas the same airbag defect on the American market. In November 2008 Honda recalled up to 4 thousands vehicles in the USA, and in the middle of 2009 issued the expanded recall.

According to the US National Highway Traffic Safety Administration (NHTSA), airbag inflator module could produce the excessive pressure inside the bag. In the case of accident defective inflator module could explode and injure the driver with metallic fragments.  In the USA one fatality has been reported because of this defect.[20]

The most important fact for us is the country of origin.  The defective airbag inflator modules came from emerging markets. Modules for American markets were produced in Mexico; those that affected the Australian market were made in Thailand.

The last example is important for our company because of our plans of global sourcing. It can be considered as the example of the loss because of negligent supplier from emerging market.  To avoid criminal and civil sanctions on consumer protection provisions the Company should develop and follow the risk-minimizing strategy.

General risks of sourcing components from emerging markets

It is important to remember, that global emerging-market sourcing has its specific risks, which differ from usual business risks.  That is why the Company has to develop risk-mitigation strategy taking an account all the possible dangers. The problem is that emerging markets are rapidly changing, so it is necessary to collect and analyze all the available information in a range of cultural and national issues ”“stability of local governments, social expectations, corporate traditions, the strength on unions, the availability of expertise, intellectual property protection and so on.

Ernst & Young, the global leader in advisory services and strategic growth markets, conducted the study of business risks on emerging markets. Analytics from Ernst & Young conducted over 900 interviews both on developed and emerging markets to understand the basic principles of successful risk management on emerging markets.  Based on certain characteristics (low-to-middle-income, recent liberalization of political system and economics, privatization of state-owned companies and so on) they defined five countries, which can be considered as emerging markets: Brazil, China, India, Russia and Turkey.  Here are the key “risk management lessons” based on the experience of top executives across emerging and developed markets.

“The main goal in emerging markets is growth. Companies have moved on from the traditional view that the primary objective of investment in emerging markets is cost saving.

Risk priorities differ by location. Developed markets focus on political, operational, and supply chain risk. Emerging markets are more likely to focus on market, competitive, and pricing risk.

Board focus does not always translate into strategy. There is a consensus that Boards are giving enough attention to risk in these markets. However, only 41% of developed market companies have a risk strategy for emerging markets.

Opinion differs on risk communication. While 71% of emerging market subsidiaries feel they provide sufficiently regular and robust information on risk, only 44% of the parent companies would say the same.

Opinion also differs on internal audit. Developed market companies have less confidence in the quality of the internal audit testing of their subsidiaries than the emerging market subsidiaries themselves do.”[21]

In addition to common risk factors every emerging market has its specific features, which have to be considered in risk-minimizing strategy. Thus, the Chinese product manufacturing and production practices are infamous with their low quality. The broader concerns regarding the components from China demands the following of product safety issues:

a) reassurance through testing. Company might hire local expert or send representatives from Australia regularly, though the optimal decision is to combine the work of Chinese professionals with outer inspections.

b) rigorous terms of contract between manufacturer and supplier. These additional terms have to oblige the supplier to intensify the quality control.

c) shifting of suppliers. The preferred suppliers might to be shifted to the other country with the greater quality regulation.

d) reserve funds. The Company should set up the risk fund to pay fines under product safety laws.

All these hidden costs of sourcing from emerging market have to be taken in account in the Company’s budget.  Another point that the Company has to consider is the possibility of operational cost increase due to most stringent quality standards. This is the consistent development of emerging market and gradual shift from price competition to quality competition. Both manufacturer and supplier could stand to benefit of higher quality standards. Supplier could easier attract global buyers, and manufacturer could make its product more competitive.  The Company might to explain this regularity to the management of Supplier Company. Working with supplier, the Company has to set up the   high standard initially and monitor the conformity consistently.


The responsible business practice is the key to risk minimization for retailers, importers and manufacturers. Any responsible organization, which wants to reduce risk of operation on emerging market, should to follow the culture of safety.  The first rule of this culture is the prudent information of the firm’s product. Up-to-date technological methods of production are another rule for risk minimizing, though they are hardly accessible on emerging markets.

Besides, quality assurance systems could be the defense of the Company if the product defect appeared after the supply time or the state of scientific or technical knowledge at the time of supply did not allow finding the defect.  The most successful companies are not avoiding sourcing from emerging markets, but they are focusing on risk management to reap the benefits of emerging markets instead.

[1] Ernst and Young, “Risk management in emerging markets”, 2007. EYGM Limited. P.3. Available via


[2]  Richard E. Baldwin, Tadashi Ito. “Quality competition versus price competition goods: An empirical classification”. NBER Working Paper No. 14305. Issued in September 2008. Available  via

[3] Council Directive of 25 July 1985 (85/374/EEC), OJ No L 210 of 7.8.1985, p. 29

[4] “International Product Liability Laws” By Bowman and Brooke LLP. 1999. 12.23.2009. Available via


[5] Commonwealth of Australia Consolidated Acts. Trade Practice Act. Available via



[6]    TPA, s52


[7]    Cowell, 12


[8]    TPA, d2A


[9]     TPA, s.75AC


[10]     Cowell, 11.



[11]     Bethune v QConn Pty Ltd (t/as Case Adelaide) [2002] FCA 1485.


[12]     Howells v Murray River North Pty Ltd [2004] WASCA 276: The defense of voluntary assumption of risk only applies when the injured person, with full knowledge of the risk, expressly or by implication agrees to waive his right to any remedy for any injury sustained. This involves the plaintiff assuming both the physical risk and also the legal risk of harm.


[13]     Jocelyn Kellam & Luke Nottage. “Happy 15th Birthday, Part VA TPA! Australia’s Product Liability Morass” Legal Studies Research Paper No. 07/35. May 2007.p. 38. Available via

[14]     Ibid, p.2.

[15]     Australian Competition and Consumer Commission Home Page. “What we do” Available via


[16]    Ibid. “Product liability”. Available via


[17]    Martin I. Algie. “Product Liability in Australia for Manufacturers” 12.24.2009.


[18]    Section 87ZB of the TPA, section 21 of the Civil Liability Act 2002 (NSW), section 8 of the Personal Injuries Proceedings Amendment Act 2002 (Qld), the Compensation to Relatives Act 1897 (NSW) and the Northern Territory Personal Injuries (Civil Claims) Act 2003 (NT) provide that no exemplary or aggravated damages can be awarded in respect of death or personal injury.


[19]    Zaravinos v Dairy Farmers Co-Operative Ltd and Pure-Pak Australia (1985) 7 FCR 195, 60 LGRA 152 , 59 ALR 603, [1985] ATPR 46,501 (40-559); Brooks v R and C Products Pty Ltd (1996) ATPR 41-537;Courtney v Medtel Pty Ltd [2003] FCA 36.

[20]    Honda. American Honda Motor Co.NVS-215jjt 09V-259. September 16, 2009.  12.24.2009.


[21]    Ernst & Young, p. 2.

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