Effective risk management is vital for every business in order to be successful.
I. Introduction
Effective risk management is vital for every business in order to be successful. This can, however, at times be quite a challenge. In particular for foreign businesses entering the German market it is essential to be aware of the potential risks associated with such market entry.
Foreign manufacturers wishing to place their products on the German market must inter alia consider their risk of being held liable for a defective product under applicable local product liability laws.
II. The manufacturer´s liability
1. Introduction
Usually, the manufacturer of a product will not be liable to a customer on a contractual basis. At least this applies in cases where the manufacturer has not sold or distributed the product himself. The customer then enters into a contractual relationship with its direct counterpart, the seller or distributor of the product. Hence, the customer must turn to its contractual counterpart – i.e. the seller – in order to bring any contractual claims.
The manufacturer of a product can only be held liable for contractual claims if he has assumed contractual obligations of his own towards the customer, e.g. by means of a separate manufacturer’s warranty or guarantee.
In all cases where there is no contractual relationship between the manufacturer of a product and the customer eventually buying the products, liability of the manufacturer towards the customer can only arise if this is expressly foreseen by a statutory, i.e. non-contractual regulation.
According to German law, the manufacturer can on the one hand be held liable on the basis of fault-based liability in tort law and on the other hand according to the strict liability of the German Product Liability Act (ProdHaftG).
Under tort law, the manufacturer is liable if he respectively his product caused damage to the customer and this damage is attributable to him and he is to blame for it. This kind of liability requires an element of fault on the manufacturer’s part.
Things are different under the German Product Liability Act which stipulates strict liability of the manufacturer if his product is defective. No element of personal fault is required here. The Product Liability Act provides for the manufacturer's strict liability for any damage caused to a customer by a defective product simply because the manufacturer has placed the defective product on the market. Accordingly, in practice it is easier – and more appealing – for any harmed customer to try and assert claims for damages against the manufacturer on the basis of the Product Liability Act than under tort law.
2. Liability according to the German Product Liability Act
The applicability of the German Product Liability Act to a foreign, non-European manufacturer is governed by Article 3 in conjunction with Article 5 of the Rome II Regulation (Rom II). According to these rules, in the event of damage caused by a foreign product, the German Product Liability Act is applicable if the product was put on the market in Germany. A product is then put into circulation when it has left the manufacturing process, is placed on the market and is offered to the public ready for use or consumption. Further, the manufacturer must have known or expected that the product would be placed on the German market in order to be subjected to the German Product Liability Act.
Moreover, it is required by the German Product Liability Act that the person that was harmed by the defective product must have had his habitual place of residence in Germany at the time when the damage occurred, or that the defective product was purchased in Germany, or that the damage caused by the product occurred in Germany.
Should the German Product Liability Act be applicable in accordance with these principles, the following liability conditions shall apply:
If a person is killed, his body or health is injured or an object is damaged by the defective product, the product’s manufacturer is obliged to compensate the injured party for the resulting damage. In the event of damage to property, the manufacturer shall only be liable if the defective product has damaged another item, which is intended for private use and which the injured person has used mainly for private, non-business purposes.
Any injured party can bring a claim against the manufacturer. This means that any user of the defective product, not only the buyer or owner or the defective product, who suffers damage can claim damages from the manufacturer. The term manufacturer according to the Product Liability Act is understood broadly and includes, in addition to the actual manufacturer of the product, also the manufacturer of product parts or of a basic material which is used for the final production of the product.
Moreover, the so-called quasi-manufacturer can also be held liable for damage caused by defective products. Anybody who claims to be the manufacturer of a product by affixing his name, trademark or other distinguishing mark to the product, will be considered a quasi-manufacturer, e.g. also a retailer who simply affixes his brand name on a product which was manufactured by someone else.
Also the importer of a product will be considered to be a quasi-manufacturer and can therefore be held liable if the imported product is defective.
In cases where the manufacturer cannot be identified with certainty, the Product Liability Act provides for liability of the supplier of the defective product instead of the manufacturer.
In the sense of the German Product Liability Act a product is any movable object, even if it forms part of another movable or immovable object, as well as electricity.
It is irrelevant whether the product was manufactured industrially or by a craftsman. In addition, the defective product can also cause liability of its manufacturer if it is indistinguishably built into another movable or immovable object. Consequently, there can also be manufacturer's liability for defective building material, e.g. grouting mortar.
Under the German Product Liability Act, a product is deemed defective if it does not provide the safety that could reasonably be expected. Accordingly, a product is considered to be free from defects if it is constructed, fabricated and instructed in such a way that it cannot impair the physical safety of the user or damage the user's private property. However, complete safety cannot be expected from a product, as every product has a certain inherent potential for danger. Therefore, when assessing the safety of a product it is essential to determine how dangerous the product is compared to other similar products on the market.
In any case, the product must comply with the latest state of the art in research and science at the time it is placed on the market. It must be noted that subsequent improvement of the product does not make the previous product line defective. Accordingly, not every technical advance leads to the previous model being labelled unsafe.
Furthermore, a product is deemed to be defective if it has a constructional flaws or a fabrication defect. A constructional flaw makes a product unsuitable for safe use by the customer as a result of faulty technical construction, design or planning. This defect may occur throughout the whole product line. The manufacturer should therefore already take the measures necessary and reasonable to avoid a concrete danger according to objective standards when designing a product. A constructional flaw exists, for example, when the manufacturer places dangerous equipment on the market without providing adequate protection (e.g. sharp rotating scissors without adequate shields).
In contrast, a fabrication defect arises during manufacture and will usually only appear in individual pieces of an entire production series. The defective product deviates from the general standard set by the manufacturer for the product series.
If the product is intended for a specific group of users, their safety expectations must be considered during design and manufacture of the product.
The manufacturer must also consider how the product will be used already during the construction and fabrication phase of the product. Even for a potential misuse of the product that could be reasonably foreseen by the manufacturer, he must make the necessary precautions.
Another category for a product defect is the instruction defect. Product liability can also be provoked by inadequate instructions given with the product where as a result users are not duly informed about the correct and safe use of the product.
The required warning notices must not be hidden in advertising statements. Rather, these must be given prominently and comprehensively. The user of the product must be able to understand the instructions for safe use and the warnings contained therein. For this reason, manuals and any other instructions coming with products which are sold in Germany must always be in the German language. If the manufacturer knows, however, that his product will be used in Germany but not only by German-speaking users, he must ensure that the instructions for safe use and all required warning notices are also given in other languages (English translation will be minimum).
The manufacturer´s liability to pay damages under the Product Liability Act can neither be excluded nor limited in advance and any agreement to this effect will be null and void.
As a closing remark, it must be noted that any manufacturer shall observe its products also after they have been placed on the market as he is under a legal obligation to react whenever he becomes aware that his products may pose a risk to users.
Before placing products on the market in Germany, any foreign manufacturer should consult a specialized lawyer and insurance expert in order to minimize the risks that come with this market entry.
