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Home > Blogs > Anthony Harrington > Who pays when Asian manufacturing falters?

Who pays when Asian manufacturing falters?

Finance Blogger: Anthony Harrington Anthony Harrington

The reinsurance giant Swiss Re has produced a fascinating study of the dilemma facing US retailers and manufacturers when products they have bought from Asian companies for sale in the US turn out to be defective. In the face of manifest difficulties in terms of cost and complexity in pursuing the Asian suppliers directly, litigants are opting more and more to use the US courts to pursue the US distributors and retailers of these products.

As Swiss Re points out, since the retailers have “hold harmless” and indemnity clauses in their contracts with distributors, the buck tends to stop with the US distributors and, ultimately, with whoever happens to be the provider of liability insurance to that distributor.

This is putting US distributors under considerable pressure to deepen their understanding of how to defend product liability suits in the US where, as Swiss Re says, “the allegedly defective product is manufactured in Asia.” It is also, of course, pressuring insurers to get a better grip of the risks and exposures they are letting themselves in for where their clients are selling in the US but buying from Asian suppliers.

Swiss Re provides a marvelous example, where a US distributor orders and distributes trailer jacks from a Taiwanese manufacturer, selling them to US retailers. The trailer jack collapses and crushes a man’s foot as he is attaching his boat trailer to his car. He sues the US distributor in a Florida court, alleging the product was defective and unreasonably dangerous in design and does not attach the Taiwanese manufacturer to the suit. In the State of Florida if you are in the chain of distribution of a defective product you are subject to liability and negligence.

Swiss Re points out that, in defending this suit, the US distributor would be gravely handicapped by the fact that since it did not design or manufacture the product, it is going to find it difficult to speak to the safety of the design. Its options then are to seek to fall back on suing the manufacturer in Taiwan, not a happy prospect, or to defend the product without full knowledge, or to try to join the Taiwanese manufacturer to the US action.

Clearly this last is easier to do if the distributor has negotiated a proper sales contract with the supplier. However, Swiss Re points out that in many instances ordinary purchase documents (lesser documents than a full, properly drafted sales agreement) will have some relevant terms and conditions related to the sale which the distributor may be able to fall back on.

There may also be a case under common law in some states, where the distributor can be shown not to have been negligent in its turn, for the distributor to have a viable indemnity case against the Asian manufacturer, thus enabling it to push the negligence claim back to the Asian manufacturer to defend.

Which brings us back to the crunch point, pursuing an Asian manufacturer is not without its challenges. The US is quite fond of trying to extend its jurisdiction through “long arm” statutes, reaching out to parties in other countries to attach them. However, this can best be done where the party in question has “continuous and sustained business” with the US, and particularly with the state in question (Florida in this instance). Quite often this will simply not apply.

Swiss Re’s study is specifically US in focus, but all importers and distributors face similar challenges and as trade becomes ever more global, issues of product liability become ever more complex. The answer? Seek advice and take steps to mitigate liability wherever possible…

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Tags: Asia , exports , insurance , liability , manufacturing , US
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