Robust contracts and due diligence assessment of supply chain can help companies recover product recall costs, says expert

Out-Law News | 06 Feb 2014 | 4:44 pm | 3 min. read

Businesses can recover the "significant costs" associated with conducting product recalls that have been caused or contributed to by supplier quality failings if they have robust contract terms with suppliers and by carrying out ongoing due diligence to ensure those suppliers are able to bear those costs, an expert has said.

Specialist in manufacturing supply chain contracting Jayne Hussey of Pinsent Masons, the law firm behind Out-Law.com, said that businesses should also verify whether suppliers have insurance cover to fund product recalls arising from the suppliers failings. She said businesses sourcing supplies from overseas suppliers should ensure they understand how to enforce quality claims against overseas suppliers and the limitations, both in terms of the legal process and time, of being able to recover amounts from those suppliers.

Hussey was commenting after sports car manufacturer Aston Martin announced that it was recalling a number of its vehicles from customers so as to replace a part it said had been made from "counterfeit material".

The company is recalling 17,590 sport cars from around the world, including all left-hand drive models manufactured since November 2007 and right-hand drive models built since May 2012, according to reports by the BBC, Financial Times and Reuters, with affected models including the DB9 Coupe, Rapide and V8 Vantage Roadster.

After a US dealer reported breaking a pedal arm when installing a throttle pedal assembly unit to an Aston Martin car in December last year, Aston Martin opened an internal investigation and suspended the shipping of the pedal arms from China, according to a defect notice (4-page / 320KB PDF) the company submitted to the US National Highway Traffic Safety Administration.

Aston Martin uses a company in Hong Kong to supply the pedal arms but that Hong Kong supplier sub-contracted the moulding of those parts to a business in China which sourced the "counterfeit material" from one of its own suppliers, according to the Aston Martin notice.

Aston Martin has said that it cannot be sure about the quality of the pedals manufactured on its behalf and has therefore ordered a recall of the vehicles it believes have been fitted with parts containing the counterfeit material. It said it plans to bring the manufacture of its pedal arms back within the UK later this year. In the mean time it has said it will directly supervise Chinese production together with representatives of DuPont, the supplier of the authentic material that is supposed to be used in moulding the pedal arms.

Jayne Hussey of Pinsent Masons said that it was usual for businesses to conduct a "root cause analysis" of the manufacturing process when a defect is identified with a product. This helps companies identify how faults have arisen and whether their own internal processes, failures in specifications or failings in the supply chain are to blame, she said.

"Where it can be identified that a fault stems from the supply chain, businesses will want to examine their contracts and establish whether claims can be brought against at least one of the third parties involved in the manufacturing process," Hussey said. "The costs of carrying out product recalls are significant so it is important that businesses' contracts with suppliers are robust enough and allow them to hold those companies liable for those costs where they are to blame for the underlying defect."

"Generally businesses will bring a claim against the supplier they directly contract with rather than a sub-contractor further down the supply chain. However, it is nevertheless prudent for those companies to assess the creditworthiness of sub-tier suppliers to establish their ability to satisfy any claim against them, as this could ultimately determine whether the contracting business can recover the costs, loss of profits, damage to reputation and other money it may be owed stemming from a product recall," Hussey added.

Insurers sell specific products that offer protection against product recall liabilities, but Hussey warned that whilst businesses can obtain "great comfort" from knowing suppliers have that insurance, they should be aware that the policies are often "narrowly drafted" and may not always be able to be relied upon.

She also said there can be problems with asserting claims against overseas-based suppliers.

"Increasing cross-border business and the internationalisation of supply contracts can provide businesses with the opportunity to make savings in production costs, but the reality is that when things go wrong it can be difficult, and expensive, for companies to enforce claims against suppliers based in other jurisdictions. Challenges may include coming to terms with a whole new set of legal rules and procedures that apply to such a dispute," Hussey said.