Liability Protection for Importers and Distributors

Recently we have seen several filings and settlements of lawsuits against U.S. companies who imported faulty products from China. Many companies who do business in other struggling countries may not be fully protected. Indemnification laws and insurance practices may be different (or, occasionally, non-existent) and companies in poorer countries may not have the funds or value to indemnify large judgments that are awarded in American dollars. And even if the laws are on your client's side, your client will still face the expense of collecting a judgment in a foreign country. (See Vesna Jaksic, "Faulty Chinese Goods May Import Lawsuits," National Law Journal, July 3, 2007, http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1183107995726&pos=ataglance.) The countries that many American companies do business with do have quality standards and laws in place, but they may not be consistent with U.S. standards, thus exposing your client to potential liability.

The basis of these suits is strict liability or breach of warranty. A purchaser can recover from a seller under a theory of strict liability if (1) the seller is engaged in the business of selling such a product, and (2) it is expected to and does reach the user without substantial change in the condition in which it is sold. McCormack v. Hankscraft Co., 278 Minn. 322, 338 n.15, 154 N.W.2d 488, 499 n.15 (1967) (quoting Restatement (Second) Torts § 402A (1965)). The Restatement Second of Torts section 402A gives the reasoning: "[T]he seller, by marketing his product for use and consumption, has undertaken and assumed a special responsibility toward any member of the consuming public who may be injured by it; [and] ... the public has the right to and does expect ... that reputable sellers will stand behind their goods." Furthermore, under the UCC sections 2-314 and 2-315 (Minnesota Statutes sections 336.2-314 and 336.2-315), the seller can be liable under an implied warranty of merchantability. UCC section 2-314(2)(c) requires that an item be fit for the ordinary purposes for which that item will be used. If the item is unfit (especially if it causes injury!), then the implied warranty of merchantability has been breached.

There are two ways that your client can protect itself from these suits. The first way is to have quality standards in line with U.S. law clearly drafted into the contract with the foreign company. Consider which laws you wish to include in your contract, and be specific when drafting. Including such standards in the contract will require your client to ensure that the foreign company is complying with the contract, but as they say, the best defense is a good offense.

Second, many large insurers (including Minnesota's own St. Paul Travelers) offer insurance policies specifically designed for companies importing foreign products. Many of these insurers also have risk management resources designed to assist companies with quality control overseas. Your client should talk to its insurer to determine whether it will need to update its insurance to manage the risks associated with its overseas operations or partnerships.