Manufacturer’s Liability for Goods with Safety Defects

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Table of Contents

• What is Product Liability?
• How Does a Consumer Make a Product Liability Claim?
• Manufacturer’s Defences
• Practical Steps for Manufacturer Protection
• Key Takeaways

It is crucial for manufacturers, importers, and retailers to recognise their potential liability for safety defects in their products. If your business distributes or manufactures products with safety defects, you become susceptible to legal claims and may be required to pay compensation for any resulting damage or injuries. This article will discuss manufacturer’s liability, as well as valuable tips for how you can reduce the risk of legal action over a product liability claim. 

What is Product Liability?

Product liability is an area of law related to injuries caused by faulty or risky products. All participants in the commercial supply chain can be held responsible, including manufacturers, distributors, suppliers and others involved in making the product accessible to consumers. 

If you are sued for damage caused by your defective product, then the court will consider factors such as:

• the quality of the product 
• how the product was presented (i.e. through its packaging, warnings or instruction booklet); and
• the extent of the loss or damage arising from the product (i.e. physical injury or damage to private property).

How Does a Consumer Make a Product Liability Claim?

Consumers have rights and several avenues to pursue legal action for damage from safety defects. Typically, there are three options for consumers to bring a claim. We discuss these in more detail below.

1. Breach of Contract

A consumer won’t necessarily need to have a direct contract with you to take you to court. If your business is part of a series of contracts that regulate the product’s journey from production to the retail floor, you could still be liable.

In principle, consumers can typically only take action against the immediate party in the contract, often the retailer. However, the retailer can then seek remedies from its contractual partner, leading the responsibility up the supply chain to the original manufacturer.

It is common for businesses to pass on risk through their contracts. Therefore, regardless of where your business operates in the supply chain, you may consider including an indemnity clause in your contracts. An indemnity clause ensures that the other party in your contract will compensate you if you incur some type of loss or harm. 

2. Negligence

By law, the original manufacturer of a product has a duty of care towards the people using their product. This duty means that if you, as a manufacturer, do not meet safety standards, a member of the public can potentially sue you directly. Not fulfilling your duty of care is known as being negligent. 

The famous English case of Donoghue v Stevenson illustrates this issue. Ms Donoghue had the misfortune of drinking a ginger beer contaminated by a decomposing snail, and the court agreed that she had grounds to sue the bottler, Mr Stevenson, directly. The court determined that the bottler, Mr Stevenson, owed a duty of care to Ms Donoghue to safeguard her against foreseeable injury risks. He was liable for her consequent illness.

Other parties that can owe a duty of care to consumers are:

• retailers;
• importers;
• distributors; or
• any party that contributes or alters an aspect of the product. 

Importantly, manufacturers are not expected to test or inspect products in sealed containers if these containers are not intended to be opened until they reach the end user.

3. Australian Consumer Law

In Australia, the Australian Consumer Law (ACL) further protects consumers. The majority of products and services purchased in Australia automatically come with consumer guarantees, ensuring that purchases will function as intended. These guarantees stipulate that products and services should be:

• safe;
• durable without defects;
• acceptable-looking; and 
• capable of performing the functions one would reasonably expect.

Consumers automatically receive certain guarantees when they buy, hire or lease goods or services. However, these goods and services must cost less than $100,000, or $40,000, if supplied before 1 July 2021. If they cost more than this amount, they must be normally bought for personal or household use. The ACL does not cover goods intended for resupply. 

The ACL broadly defines a ‘manufacturer’. Therefore, you may be considered as such if you:  

• are the actual manufacturer;
• produce goods;
• import goods into Australia; or
• allow your brand or name to be applied to goods.

Under the ACL, you must compensate consumers if you supply a product with safety defects that result in loss or damage. Loss and damage can include:

• injuries to the person making the claim, or injuries or death to another individual; and
• economic loss caused by damage to, or destruction of another good, land, a building or a fixture.

Additionally, the ACL establishes mandatory safety standards for products. It grants the government authority to ban products or initiate recalls in cases where injury is a potential risk. Therefore, it is crucial to recognise that not only consumers but also government authorities can hold you responsible for safety defects.

Manufacturer’s Defences

If a consumer brings a product liability claim against you, there are potential avenues to avoid liability. You will need to demonstrate that:

• the safety defect did not exist at the time of supply;
• your manufactured product was merely a component of the finished product, and the safety defect arose due to the overall design of the finished good or its packaging;
• you could not have discovered the safety defect when you supplied the goods because there was insufficient scientific or technical knowledge at the time; or
• the safety defect only existed because you complied with a mandatory standard, in which case the government may be responsible for compensating consumers.

Practical Steps for Manufacturer Protection

Rather than waiting for a defect to occur and defending yourself and your business in court, you should proactively take steps to reduce the risk of an accident. These steps are tabulated below. 

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Key Takeaways

Product liability has implications for businesses at all stages of the production and sales process, encompassing manufacturers, distributors, suppliers, and retailers. Consumer protections regarding products with safety defects are extensive, and you should be aware of these standards. While there are defences you can raise if a consumer takes you to court, it is important to implement practical steps to protect yourself from potential legal issues. 

If you would like assistance regarding liability as a manufacturer, our experienced competition lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.