The decision to outsource manufacturing processes is a difficult one for many domestic companies. Although domestic production and labour costs are increasingly prohibitive, there is a significant cost associated with ensuring the safety and integrity of products produced in jurisdictions outside the direct supervision and control of the domestic company. Even where the foreign manufacturer is clearly at fault for the product’s non-compliance or defects, product liability claims will be made against the most accessible parties - domestic importers, distributors and vendors. These are also the parties whose reputation may be at risk in the event of litigation or a recall.
Decisions to outsource involve addressing questions in the area of contract law, insurance law and private international law.
Back to top
Quality control and quality assurance
Because product quality standards and controls vary from country to country, it is necessary to ensure that foreign manufacturers abide by Canadian or North American standards. Although some foreign governments are in the process of reforming product safety laws, formal implementation may still be some time off and private contractual oversight remains the best way to ensure compliance with our domestic standards.
Contracts should provide clear quality standards, quality assurance and control mechanisms. Companies purchasing overseas should provide detailed information of their expectations and even consider providing assistance to the supplier in setting up a comprehensive quality management system. Direct involvement in on-site monitoring and testing at the manufacturing plant would reduce the prevalence of defects and dangers. Developing a long-term relationship with parties abroad is likely to help avoid misunderstandings about expected quality. While the increased cost of on-the-ground involvement is to be considered on a case-by-case basis, it will likely be offset by low production and labour costs, and the avoidance of recalls and litigation down the road.
In order to protect themselves in the event that quality control measures fail, companies should include indemnity provisions, whereby the manufacturer undertakes to reimburse the buyer for any losses suffered. Buy-back provisions, whereby the manufacturer undertakes to repurchase defective products, may also be considered.
Canadian companies must also, of course, be sure that any contract entered into is with the primary supplier, and not merely a middleman on the foreign market who is not the maker of the product and who, in the event of a product issue, may not be able to assist in analyzing the manufacturing problem that may have led to the issue or to effect necessary corrective action.
Back to top
Outsourcing may also require making certain changes to insurance policies, which if not addressed could fail to provide the protective function of insurance. For instance, companies may wonder if they are required to notify their insurers of a substantial shift of their manufacturing process to a foreign manufacturer. Could an insurer attempt to void the policy at a later date on the basis that such a shift is material to the insured risk and therefore should have been disclosed? The increase in product defects may also result in insurers attempting to deny coverage on the basis of policy exclusions or by arguing that the defective processes are deliberate, not fortuitous.
Particular attention should be paid to recall insurance, which provides for greater safety, since no damage or injury is required for the policy to be triggered. An importer acting proactively and voluntarily removing a defective or dangerous product from the market may therefore have coverage, subject to specific terms and conditions of the policy, for the costs associated with communicating a recall, replacing defective products and handling any public relations crisis. It may also be profitable for certain companies to procure a form of trade disruption insurance, which protects against the possibility of an overseas supplier encountering trade restrictions due to investigations by Canadian officials into the safety of the product and of being faced with the need to find a replacement supplier.
Back to top
Choice of applicable law and arbitration
In the event of a legal dispute with a foreign manufacturer, domestic companies can ensure that the situation is to their advantage in a number of ways. In order to avoid further litigation and the need to determine the appropriate forum in which to institute proceedings, Canadian buyers should consider including an arbitration clause in their contracts naming a choice of forum other than the jurisdiction of the foreign manufacturer as well as including a clause relating to choice of applicable substantive contract law.
Back to top
All parties involved in the production, distribution and sale of consumer products are responsible for ensuring that their products are safe and meet applicable standards. Careful attention to quality procedures and standards when contracting with a foreign service provider will assist in meeting such responsibilities and will position domestic manufacturers, importers, advertisers or vendors of consumer products to meet obligations under Canada's draft legislation, the Canada Consumer Product Safety Act.
Back to top