Deacons explains how franchisors can be liable for faulty products
by
Norton Rose
The law of product safety developed from the Donoghue v Stevenson duty of care principle, in which a consumer found a snail in a ginger beer bottle and suffered illness as a result of consuming the drink. The House of Lords held that the manufacturer owed a duty of care to the consumer regardless of whether or not a direct contractual relationship existed between manufacturer and consumer. Common law liability according to the Donoghue v Stevenson principle requires a manufacturer to have a "reasonable foresight of consequences" and enables a consumer to take action if he or she suffers loss as a result of the manufacturer's failure to take reasonable care.
This liability is now reinforced by statute, and has been extended beyond manufacturers to any person who supplies goods to a consumer. Part V, Div lA was inserted into the Trade Practices Act ("the Act") in 1992. The section introduced a strict liability offence that applies to any corporation who supplies goods to be used, or intended to be used, or of a kind likely to be used by a consumer if the goods are subject to a:
(1) prescribed mandatory safety standard and does not meet the standard;
(2) notice declaring the goods to be unsafe;
(3) notice banning the goods from sale; or prescribed consumer product information standard and does not meet the standard.
The Regulations under the Act require certain goods to comply with prescribed standards of performance, composition, contents, methods of manufacture, design, construction, finish or packaging rules. Safety standards are generally declared in circumstances in which products are shown to pose safety risks to consumers, with mandatory standards developed to minimise the risk of harm. Examples of products with mandatory safety standards include sunglasses, bicycles, protective helmets, children's clothing, cigarette lighters and jackramps. Where no mandatory standard exists, the ACCC will apply an objective standard based on public expectations.
A franchisor will be held prima facie liable if the goods supplied to franchisees if retailers do not comply with the above requirement. No fault element needs to be proved, and liability cannot be restricted by contract. Franchisors and franchisees involved in marketing and promotions have further exposure even when they are not the supplier. Liability may also be incurred where a company makes a false or misleading statement about the particular quality of a product supplied, for example, that the product meets the requisite standards, when in fact, it does not. This does not have to be a particularly detailed statement – inclusion of the product in a catalogue may imply that the product meets the standards.
A breach of the law in this area may have serious consequences including potential liability for civil damages and in some circumstances criminal prosecution. It is not sufficient for franchisors to merely rely on compliance certificates provided by suppliers, and claim ignorance when products are found to be non-compliant or unsafe.
To protect brand image and uphold commercial reputation, franchisors must ensure, where possible, that all products supplied to franchisees and consumers comply with safety standards, are not banned or are not unsafe. To minimise the risk of liability, all supplier agreements should:
(1) contain warranties that products supplied comply with the requisite standards and are not unsafe;
(2) contain an indemnity clause so that in the event that the product is subsequently found to be non-compliant, the manufacturer/supplier will be required to indemnify the franchisor/ franchisee for any loss suffered;
(3) provide contractual obligations upon the manufacturer/supplier to recall products in circumstances where products are assessed to be non-compliant with requisite safety standards or do not comply with representations that may have been made concerning compliance with any standard of quality, safety or other characteristic;
(4) contain a requirement that manufacturers and suppliers have products independently assessed on a regular basis to verify compliance with requisite standards and must notify the franchisor of any failures to meet required safety standards.
Franchisors should also implement compliance processes and regularly request evidence from suppliers that the products comply with the prescribed standard and should also regularly check the ACCC website for updates on product safety information. While the product safety regime is strict, having an understanding of the law, implementing appropriate supply chain compliance processes (including appropriate contractual terms within supplier agreements) will assist Franchisors to meet their obligations and minimise the risk of both civil and criminal penalties and irreparable damage to the reputation of their brand.
Deacons is Australia's leading franchise law firm, with 15 offices throughout Australia and Asia.
See the running a franchise page for additional information. 23.07.2007
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