When product liability works to your advantage

“Know your customer” is the mantra of marketing. You can only be successful if you know what your customer wants and how to give it to him. For instance, you will have a big advantage over your competition if you know the legal environment your customer works in, and how to make it work to your advantage. There is a huge difference if your customer is in America, or if he is in Europe.

There are two words that send shivers down the necks of parts manufacturers: “Product liability.” Sure, you can take out insurance against product liability. Before you get the insurance, you will have to fill out a questionnaire. One of the first questions asked is: “Do you ship product to the United States of America, or Canada?” Be careful with that question. If you proudly check the “Yes” box, your insurance will either be denied, or it will be so expensive that the insurance premium eats up the small margins on your deal.

Product liability can get very, very expensive in the United States or Canada. There, product liability attracts lawyers like light attracts flies. We all heard about the case where a jury awarded 3 million dollars to a woman who poured hot coffee in her lap (the matter was later settled out of court for an undisclosed sum.) Did you hear about the one where a defective part caused a helicopter to crash? The helicopter fell on a Mexican immigrant and killed him. He wasn’t even legally married. But his “wife” received $950,000, and her children received an annuity worth well over $5 million.

An importer will usually put clauses into his purchasing contract that make the supplier assume the risk of product liability. On one hand, it’s fair: If the supplier made a bad product, the supplier should pay for the damage. On the other hand, it can amount to suicide: Just one successful product liability award in the USA or Canada can bankrupt a whole company. Be careful of what you sign. Even if you don’t sign a product liability clause, you still can be held liable.

Why does the insurance questionnaire ask about the USA or Canada? In other countries, the law is much different. It works to your advantage if you know how different.

According to the German Product Liability Act, the manufacturer or importer of a product can be held liable for damages caused by a faulty product. But here, the law is much different than in the U.S. For one thing, the product must have been faulty when it was sold. If it breaks afterwards, no liability. If the so-called “fault” was caused by the product adhering to rules and regulations, no liability. If  it was not possible to notice the fault, using generally accepted means, when the product was made available for sale, no liability.

What does that mean? If you make a good product (“not faulty when it was sold”,) you are well protected against liability. Also, you can imagine that it is usually very hard to prove afterwards that the product was faulty when it was sold. If you make your product “adhering to rules and regulations,” very little risk for liability. If you establish tight quality assurance, possibly by using a quality assurance company from Germany, if they sign off on the product, then you have a case of “not possible to notice the fault, using generally accepted means.” Your liability risk is next to nil. That’s why you hear very little in terms of product liability claims coming from Germany or anywhere from Europe.

A supplier contract should give the European buyer the assurances that the supplier will make a good product, that it is made according to the rules and regulations, and that the supplier submits to tight, well documented quality control. This should be a given anyway. Only a fool will buy the product without these assurances. Once these assurances are given, then the product liability risk can be assumed also, because with these measures in place, the risk will be virtually non-existent.

If a supplier refuses to give these assurances, a European customer will assume that the supplier plans to make a bad product, that the supplier doesn’t intend to adhere to the rules, and that the supplier has no quality assurance in place.

Who do you think gets the deal?

The supplier who knows the law and who can make it work to his advantage.

About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.