Product–related risks are one of the greatest perils that businesses face today. Defective products not only pose a serious safety risk to the public, but can also cause significant financial and reputational damage to the companies concerned. Product recalls are increasing in size and number, predominantly driven by the increasing complexity of global supply chains and the concentration of certain components or ingredients in the hands of a smaller number of suppliers, as well as tougher regulation.
While the discovery of defects in products is quite common, their consequences can be very significant. There are two substantive threats when it comes to potentially unsafe goods: product liability claims and product recalls.
The term “product recall” generally refers to the situation where manufacturers attempt to recall products that are already on the market or have been sold to the end customer. The reason for the recall is either a lack of authorization (e.g., certifications or licenses when using patents) or defects in the product.
Product liability, on the other hand, is a legal instrument by which manufacturers are made responsible for damage caused by defective products. In this context, product liability is a collective term for all circumstances in which a defective product causes personal injury or property damage, for which the manufacturer responsible for the product is liable under legal regulations – even where there is no other legal relationship between the manufacturer and the product user.
Globalization and the consolidation of industries mean that claims in general are getting bigger, and often span multiple jurisdictions. In times of crisis, if not handled well, product recalls and product liability can result in enormous costs and reputational damage for the manufacturer.
Due to the strong influence of European Union (EU) legislation, product liability and product recall laws are very similar across Europe. However, one persistent difficulty with product liability is that it is not uniformly regulated throughout the EU, let alone the world.
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Tougher regulation and harsher penalties, the rise of large multinational corporations and increasingly complex and consolidated supply chains, the current socio-economic landscape, increasing threats of litigation, technological advances in product testing, as well as heightened consumer awareness – and growing use of social media – are just some of the many factors contributing to the significant increase in exposure to the risk of product recall over the past decade.